Springing Back It's not a mirage. The end to the long VC investment dry spell is within your reach.
By C.J. Prince
Opinions expressed by BIZ Experiences contributors are their own.
After 18 months of steadily declining venture capitalinvestment--and ever-gloomier forecasts for the foreseeablefuture--entrepreneurs may finally have a good reason to hope forbetter times. For the first time since mid-2000, VC investment rosemodestly in the fourth quarter of 2001 to $7.1 billion, accordingto the PricewaterhouseCoopers (PwC) "MoneyTree Survey,"in partnership with VentureOne and the National Venture CapitalAssociation (NVCA).
Overall, VC investing for 2001 was still drastically behind theprevious year's capital free-for-all-down from $99.6 billion to$36.5 billion. But Kirk Walden, national director of venturecapital research for PwC, says 1999 and 2000 were anomalies in VChistory, representing investment levels historically unprecedentedand completely unsustainable. He points out that in 1998, justbefore the dotcom balloon swelled to full size, VC investing hadreached $19.2 billion. "If you take the Internet bubble out,you almost double the historical precedent," says Walden."That's a healthy level of investment."
Still, VCs are just coming off a long period of hunkering downwith existing portfolio companies during a time when liquidityoptions have been quite scarce. In Q4 2001, investment inearly-stage companies remained below 20 percent-a number thattypically stayed in the 30 to 35 percent range, says JeanneMetzger, NVCA's vice president of business development. In aseparate survey of 400 VC firms conducted by Fountain Hills,Arizona-based Profit Dynamics in October 2001, 55 percent ofventure capitalists believed the level of investing in early-stagecompanies would decrease over the following 12 months because ofthe demands of existing portfolio companies and the poor economicconditions.
By comparison, 34 percent of VCs believed early-stage investmentwould increase due to the tremendous amount of capital sitting idlyin VC coffers, according to Dee Power, vice president of ProfitDynamics. And Metzger adds that most NVCA member firms beganreporting in December that they were starting to look at newventures, though they're taking their time with their selectionprocesses.
Battery Ventures, for example, spent most of 2001 making surethe companies it financed in 2000 and 1999 were stable and had theright business plan for the new environment. "Most ofthat's done now," says general partner Morgan Jones. Thefirm is now slowly and carefully turning its attention to newinvestment opportunities. "I don't think anyone is goingto run off and make fresh investments without doing all thehomework," he says.
According to Walden, VCs are now looking for companies withsolid revenue streams, and they're willing to trade arelatively high, quick return for sustainable growth. "Ifyou're a company that's been in business for a couple yearsand you have a revenue stream, then your chances are probablybetter than they were 18 months ago," he says.
BIZ Experiencess still have to satisfy the traditionalrequirements-such as a talented management team, a high-growthmarket and the right product for the market's need-but they nowmust also prove their businesses' capital requirements matchthe current market environment, says Morgan. "You're notgoing to get funded today with a business plan that says you haveto raise $100 million before your first sale. People are lookingfor much more conservative spending plans."
Where the Money's Going
The "MoneyTree Survey" results also show a renewedinterest in software investing, despite a huge decline ininvestment-from 18.4 percent in 2000 to 10 percent in 2001-inretailing and distribution companies, which had been heavilyinvolved in online retailing. "The majority of venture capitalhas always focused on high-tech-biotech, medtech, software andhardware," says Power, "[both] pre- and post-dotcommania."
Still, the dotcom meltdown may have primed VC investors foropportunities outside perennial high-fliers. "BIZ Experiencessneed to screen venture capitalists by their investment parametersand look for those who say they will invest in areas other thantech, or who have actually invested in those areas," saysPower, adding that most VC Web sites now contain lists ofparameters.
Power and other experts agree the turnaround as far as VCreceptiveness to new investments will be slow out of the gate,gaining momentum through 2002 and rebounding more fully in 2003.But fourth quarter 2001 numbers suggest that optimism won't beout of line. "To paraphrase Mark Twain, the rumors of venturecapital's death are greatly exaggerated," says Walden."The dotcom death, yes, but not all of venturecapital."
C.J. Prince is a New York City writer who specializes inbusiness topics and is the executive editor of Chief ExecutiveMagazine.
Contact Source
- National Venture Capital Association
(703) 524-2549, www.nvca.org
