With the current state of the economy, I am often asked by friends and acquaintances about the state of the venture capital environment. My response will usually address one of the topics below.
- Lack of Liquidity – One of the biggest issues is the current lack of liquidity. The venture capitalists’ job is to create a hopefully good return for their investors, with returns coming through such liquidation events as a merger, acquisition, or an initial public offering. For over the past year the public markets have essentially been frozen with the National Venture Capital Association actually proclaiming a “Capital Market Crisis“. As a result, there has been mention of an emerging secondary market for private stock. Thankfully, though, within this last quarter a handful of companies have gone public (I am not sure the total since the data is not yet out, but I want to say at least 2 or 3 companies with Open Table being the first).
- Difficult Fundraising Environment – Limited Partners have halted or stepped back from venture due to huge hits on their public investments, sometimes resulting in their portfolios experiencing the denominator effect. The combination of lack of liquidity and LPs holding their money close while the market stabilizes has resulted in fundraising being extremely difficult for anyone except top tier funds.
- Smaller Fund Sizes - Venture firms have reacted to this rigid environment by raising smaller funds.
- Some Changes in the Venture Players - There have been some VCs who have closed shop, but there are also new entrants (i.e. Javelin and Founder Collective).
- Innovators Continue to Innovate – The innovators keep creating, as they should. There are positives to this economic environment (for example lack of competition) as long as start-ups realize that funding is still out there, though perhaps a bit harder to find. If anything, this type of environment creates entrepreneurs that are wise and efficient with the capital raised.
While reading the private equity news the other day, I saw a link to an interview with Steve Jurvetson and Tim Draper. Nothing about the interview was too profound, but I enjoyed seeing these VC titans talking about the same trends I was seeing. I must admit that my favorite part was when Tim and Steve were continually questioned about different “important” financial and numbers, none of which relevant to the venture capital realm or these two investors.
Unfortunately I could not embed the video directly, but the above image is linked to the video feed.