What’s happened to the VC’s?
I recently read a report that broke down the trends in venture capital investments from 2010 and there were definitely some interesting nuggets, but the fact that has me most intrigued is venture capitalists appear to be laying off early stage investments and focusing their efforts on later stage companies, leaving the early stage and seed investments to the ever expanding world of the Angels and Super Angels.
This is a trend that’s readily apparent in the valley as well as on the east coast. I personally think the whole trend dates back to the now infamous “R.I.P: Good Times.” presentation that was distributed by Sequoia Capital a little over two years ago. In that presentation Sequoia advised its companies to make cuts and hold onto money because the recession was going to be a long and arduous ride and additional investment was going to be hard to come by. That presentation went viral and it signaled a change in the mindset of most VC’s and definitely their portfolio companies, whereby everyone basically decided to batten down the hatches and ride out the storm.
Of course that presentation didn’t stop new companies from forming, but these new companies are scrappier than they were three or four years ago and the entrepreneurs behind them are scrappier too! They’re very interested in getting profitable quickly and with as little fundraising as possible! That trend is one I whole heartedly support, because it means businesses are being evaluated more cohesively and business owners are being more intelligent and more thorough when they launch, rather than raising millions and spending like drunken sailors.
This new mindset of the entrepreneurs is a breath of fresh air, but the VC’s never seemed to recover from that presentation. I know a number of great businesses that have folded up over the last two years simply because they couldn’t raise the seed money that they used to get from the VC’s. The VC’s appear gun-shy now and although a nice bump in funding was seen during the last two months of the year, I’m certain the rest of the year saw the majority of early stage funding from angels rather than VC’s. The angels are now the go-to-group for early stage, and the VC’s are networking with those same angels to provide Series A or B investments to those that “graduate to the big time”, so to speak.
The angels are now taking over this aspect of the business, and I can’t decide if that’s a good thing or not. The angels are dominated by a number of very wealthy individuals and a strong number of angel groups. The rest of the angels are entrepreneurial minds with some discretionary savings and a taste for the start-up world. The angels are typically what we call “smart money”, meaning people with connections and contacts that can benefit a specific company. These are people with a passion for the business and they tend to get very involved in their investments to make sure they get a positive return. These start-ups are scrappy, but the angels are scrappy too! What I find interesting is that when scrappy entrepreneurs and scrappy investors get together, good things can happen and these companies could take off, fast becoming profitable on their own, possibly not needing the VC’s in the long run.
The long term consequences of the shift in the VC world could mean that there will be fewer companies for the VC’s to invest in later because these companies simply may not need them! Additionally, the VC’s have always liked risk; that’s their business. They all shoot for the fences trying to find the next Google, but what if they all bypass this next generation of company and the Google of the future doesn’t need their money?
I feel like the pendulum has to shift back at some point and the VC’s will jump back into the early stage investment arena but I wonder when that will happen. Will it be in 2011 or 2012? Maybe sometime even later than that?
The next 18 months promise to be an interesting period. The economy is showing signs of life, and new companies are showing life as well. How will the VC’s react and who will write the next big viral presentation entitled “Welcome Back Good Times; Let’s Take It Easy This Time Around”?