Google Ventures Joe Kraus on how VC is changing

Entrepreneur-turned-venture capitalist on bubbles, M&A, diversification and secondary markets

This is the second part of my interview with Joe Kraus, partner at Google Ventures. Given the latest deals, such as the recent $100 million investment in 18-month-old Square, at a $1 billion valuation, or Living Social's potential IPO at a $15 billion valuation, up from $3 billion two months ago, it sure feels like a bubble. What better question to kick off the interview with.

"Are we in a bubble?" I asked. "If we are, it’s a very different kind of bubble from the last one in 1999," said Joe, who lived through the famous Internet bubble as a search pioneer, having founded Excite in 1993 as a 23-year-old senior at Stanford. Excite went public in 1996 and eventually acquired by AtHome for $6.5 billion in 1999 (right when the bubble was inflating). And, most of us know what happened in 2000 and 2001. Valuations weren't sustained, and many investors lost their shirts.

Today, there are a select few that are generating real revenue and real earnings, and while their valuations are inflating, the people participating in these investments are professional investors, Joe explained. 

Indeed, the investors, notably Andreessen Horowitz, are the ones putting high price tags on these select investments. And, maybe a few companies - despite a collective worth of $150-plus billion (if you add Facebook) - won't drive a market crash in 2012. But it sure feels unsustainable.

Here are two other highlights:

- Thoughts on the rise of seed-to-early stage investors from DST, angels and incubators? Is their presence sustainable? Joe believes that large-cap companies will continue to look for growth through acquisitions. "I don’t see the wave of anything from $5 to $50 million exits slowing down because that’s easy for large cap tech companies, either in talent pickups or ‘I want to get smart in a particular markets,'" said Joe. This means there will be exits, though maybe not blowout returns.

- Thoughts on investing in 100 to 200 startups a year? "You have to have a large diverse portfolio of companies in order to get one that’s a hit," Joe explained. "Half the companies that made funds were undersubscribed in the A and B rounds," he added. That means that "in the early stages, people overestimate their ability to pick."

- Thoughts on secondary markets? The secondary markets make it difficult for companies to figure out how to keep employees motivated and hungry, Joe said.

Watch the rest of the interview for more of Joe's insights on the changing venture landscape.

(Note: Joe will be joining us for upcoming Splash event on September 29. Be sure to join us. Also, if you're interested in mingling with top VCs and angels and entrepreneurs, check out our Venture Shift event on July 20 in San Francisco.)