There have been a ton of reports on the massive drop in venture capital funding deployed in Q1 2009, so there is no need for me to rehash the facts and figures in my blog. I did spend a bit of time cutting up the numbers, hopeful that the drop was concentrated in only one area. When I downloaded the funding report from the NVCA I was expecting later-stage cleantech deals to have been the hardest hit. My thesis was that tourist hedge funds were leaving the cleantech project finance world. I may have been sort of right; late stage and expansion stage deals dropped by almost $4 billion in volume vs the previous year and cleantech was off by almost $1 billion - but that still left a huge % decrease for all other sorts of early stage technology and non cleantech startups. So, it’s pretty grim across the board.
Below are a few observations for the startup founder trying to raise their first venture round in this climate.
- Fund raising is taking longer than ever. VCs are more cautious than a few years ago. Partners at venture funds are also more distracted than usual managing their current portfolio. Can your startup survive for six months while you try to raise capital?
- Many venture funds are slowing their deal making pace. This means that they are making fewer new investments this year as part of a plan to increase the longevity of their current fund, among other reasons. It doesn’t hurt to make sure you are including the most active funds in your process.
- The bar has been raised. It’s just harder to be one of the few companies that are able to be funded. You will likely have to speak with a ton of funds to find the one(s) that understand your business plan well enough to want to actually fund it. You should listen very carefully during meetings with VCs to see what the common objections are to your startup. Perhaps you can better address these issues before you meet with the next VC…
- Every dollar needs to go further. Venture capitalists are more focused than ever on capital efficiency in their investments. Make sure your spending plan is not too aggressive for the current zietgeist.
- Some funds may have money left to invest, but aren’t actually making new investments right now. Only talk to funds with still have dry powder to invest. I’d suggest speaking with venture funds that have raised their most recent fund in the past 30 months or who have committed capital to a NEW investment in the past 4-6 months. You don’t want to waste your time with a fund that has only one shot left in their fund if they haven’t raised a new fund. If there is no new fund to invest from after that final investment is made… well, that final investment decision could be a long one.
I realize that the above observations aren’t positive, and suggestions on how you can cope with them are pretty light-weight. It’s a nasty environment for the company looking for venture financing and there aren’t any easy answers.
