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VC Slump – It’s Real July 19, 2008

Posted by John in Technology.
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Gigaom has a story with numbers that VC investments are flat. It’s true the VCs are in a slump. I wrote on July 1 about VCs problems and opportunities.

Then I wrote.. The big problem is lack of liquidity. My last company was venture backed in Silicon Valley. When there is no capital markets both on the public and M&A side I can tell you that things get crazy.

Most VCs don’t know what to do with portfolio companies after 3 years (even when they are performing ok) Their model is 3-5 year horizon. I would argue with the new environment that their investment time horizon is now limited to 3 years. If there is no exit after 3 years the number of investments a partner makes starts to backup – what I call “portfolio gridlock’. This means that they get “deal backlog’.

A venture partner is like a sales rep – they need new deals in their pipeline and to get the old ones out. No human can be on 9+ boards and be effective. So VC need to get rid of their old companies and make way for the new. It’s a problem screaming for a solution.

Comments»

1. Denny K Miu - July 19, 2008

John, as you know, I am a big proponent of bootstrapping. That’s not to say to that as entrepreneurs, we don’t take VC money, just not during the R&D phase. It is really cheap to build companies these days. Once we have a working product and a sustainable business model, my experience is that the VC’s will find us. We don’t need to find them. The following is a summary of my thoughts (for your readers). Thanks for the article.

Why We Must Bootstrap to Succeed (by Denny K Miu)
http://www.lovemytool.com/blog/2008/06/bootstrapping.html

2. John Furrier - July 19, 2008

Bootstrapping is the way to go for sure. One thing that no one is talking about is how the angel market is changing. Angels provided a great layer of service in the ‘old’ bootstrapping days. Now with entreprneurs who have made money or even early employees at successes (like google), the angels are different. Some don’t align with VCs at all some do.

I agree that the way to do it is to bootstrap and let the investors find you.

VCs can get impatient if they invest too early and then they have the backlog problem of companies to manage. You don’t want VCs on a young board who have 9 other companies to manage. It gets even worse when they have >50% control.

great article Denny

3. Dave Hodson - July 19, 2008

John, VCs can’t have “portfolio gridlock” forever! Funds have a 7-10 year life max, so they can only keep the powder dry for so long.

4. James Hoffman - July 19, 2008

Dave,
Its true they funds have their lifecycle but VCs have companies that are doing ok but not on the trajectory that the VCs need from an IRR perspective.

What this means is that companies have viability but just not what the VCs want so they have to do something with them. Either kill them, sell them, or give them back to the entrepreneur.


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