Breakfast in the Valley: Market Indigestion on the Menu

Three key venture capitalists and an editor weigh in on tech shakeout, and their verdict is Darwinian.
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SAN FRANCISCO -- In the beginning, there was venture capital. And before that, breakfast. That's how Silicon Valley history is told.

So what better way to attend to the current markets upheaval than a breakfast with some of Silicon Valley's hottest hotshots. At my table were venture capitalists Steve Jurvetson of

Draper Fisher Jurvetson

, Ann Winblad of

Humer Winblad Venture Partners

, and

Inktomi

(INKT)

co-founder and chief scientist Eric Brewer.

This was no ordinary breakfast nor a regularly scheduled commiseration at the

W Hotel

, but rather, a breakfast arranged by

Vanity Fair

, which features the three in its "eStablishment 50." (It was unfortunately dubbed an "eBreakfast" by the magazine.) They were gathered to discuss the future of the Internet. But the stock market dominated the conversation at my table and for good reason.

The story of tech stocks starts and ends with venture capitalists and their ability to turn fledgling start-ups into IPOs. Last week's apocalyptic market stops threatened not just tech stocks, but the creators of tech stocks, people like Brewer, Jervetson and Winblad.

They felt the pain, after all, these guys lost (and in some cases gained back) untold millions in the last week. Untold because I can't begin to calculate their stakes in the likes of

Yahoo!

(YHOO)

,

Microsoft,

(MSFT) - Get Report

,

AOL

(AOL)

and

Wit Capital

(WITC)

for Jervetson, and

TheKnot

(KNOT)

,

Netopia

(NTPA)

and

Wind River

(WIND)

for Winblad. Brewer took a hit, too. On March 9, he was reportedly worth $1.3 billion, but since then, Inktomi's stock has fallen more than 36%.

A Different Kind of Meltdown

"This meltdown

is

different than last April, or August of '98," Winblad said. "There was too much froth coming into this, too many deals rushing in the door, too many IPOs rushing into the market." And this, mind you, from the firm that brought the world the talking sock puppet of

Pets.com

(IPET)

.

She says she's happy to see the junk dot-coms go by the wayside. Early rounds of financing, she predicts, will be left to pros like, well, her. "In 1995, the typical IPO had been founded 6.7 years beforehand," she said. "Last year, we were taking public 1- and 2-year-old companies. ... I think those days are now behind us."

VF's

editor-at-large Matt Tyrnauer, dressed in a very

Conde Nast

, blue, three-button suit, blue shirt and deep blue tie, referred to this notion as "the beginning of a dark, Darwinian period," a notion that Jurvetson was only happy to take up.

"The great thing about the air coming out of this market is that the VCs holding up these 'runner-up' companies are going to disappear," he said. "There are no runner-ups in this economy. VCs, companies, investors will all feel this one -- I think Darwin will appear at all points in this economy."

Jurvetson also said that his firm is considering using its massive investment reserves to pump more cash into some of its struggling public companies, though he didn't single out potential candidates. But some of Draper Fisher's less-than-successful ventures include

Kana

(KANA)

and

Tumbleweed

(TMWD)

.

The Other Side

But playing the other side of the net, there was universal agreement that the Internet economy will be better poised for growth after this shakeout.

"This is like a forest fire," said Brewer. "In the end, it will be a thinning out that's healthy for the ecosystem." Brewer made an odd, but interesting case, suggesting that Wall Street's inability to fathom Inktomi actually had helped his company avoid a more punishing fall.

"In terms of a stock, we are hard to understand," he said. "We're a software infrastructure company, we're behind every click on the Internet, we do half of all search on the Internet. It's hard to understand, and we can't explain that to Wall Street either. But in the end, we're going to be profitable this year, we have revenues, we have a real business and that's why we're going to be OK."

Indeed, if there was a central theme from these three, it was that this shakeout was real, but that there was plenty that this tape

needed

to shake out. "The top Internet companies dropped 30%," said Brewer, "but the others dropped 80%. I think that's an encouraging sign that Wall Street knows the difference between the two."

And Jurvetson, for one, believes that with wheat-from-chaff-time upon us, it's time for investors to start buying stock. "You know, a few stories ... really got investors thinking about the fear side of these things," Jurvetson said, racing out to his car after breakfast. "And that's good. But now these earnings numbers are showing us that the underlying businesses are growing rapidly. I think investors should be loading up the boat on Internet companies here."

And which ones? "Same old story: solid management with great market potential," he said. "But that's easier said than done."

This last month surely proved that.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.