Tuesday, January 20, 2009

Trickle down funding (click here)

According to the National Venture Capital Association (NVCA), funding for venture firms plummeted in Q4 '08, and showed a steep reduction for the year too. The combination of the dislocations in the financial services industry, stock market collapse (creating the denominator problem, where institutions become over weighted to alternative investments as a % of their portfolio, due to the decline of their public investments) PLUS, the poor exit performance of the asset class are each contributors to the poor performance.

Not surprisingly, the greatest impact was felt by new funds (my personal experience corroborates this), which faced a daunting environment.

No doubt the harsh fund raising experience faced by funds will have at least three impacts:

1. A shift towards later stage investments. Early stage funds will adjust their definition of early stage away from pre-product, and towards pre-revenue, or from pre-revenue to pre-$2mm revenue, etc.

2. A reduction in the number of new investments as funds will increase reserves for existing investments as firms anticipate a difficult follow-on environment.

3. More investment syndicates as funds seek to diversify risk by pooling sufficient capital (in a capital constrained world) to build market leaders.

As the cost of capital has surged, all participants in the value chain; from VC's, to entrepreneurs, to vendors, and ending with customers, will all seek efficiencies in spending, and innovative ways to build businesses and offer value.

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