I've written before about the general mood here in the Silicon Valley now that the economy is officially down. This week, at the AlwaysOn Venture Summit Bay Area angels and VCs dove deeper into the impact of the economy on their investment plans and the overall changes we'll see in the coming year.
Ron Conway, Founder, SV Angels opened with the observation that today's situation is much better than it was in 2001. Back then, Conway said, the epi-center of the crisis was the Bay Area. Now it's Wall Street. Conway estimated that in 2001 75% of companies went out of business. Today's it's under 20% in most cases. Conway sees rate of investments staying the same; his emphasis now is on 'wisdom of crowds' powered search results platforms, instractables, How To websites, cloud, and other new sectors that are just popping up.
Jeff Clavier, Founder and Managing Partner, SoftTech VC, confirmed that reliance on ad revenue as a business model must change. He warned that quality deal rate will go down and price expectations will likely regress to 2003-2004 prices. Nevertheless, Clavier is seeing good companies getting funded even at year's end and expects those who are doing interesting things to be funded in '09.
Aydin Senkut, Founder & President, Felicis Ventures, provided a different perspective: the fact that deal flow hasn't come down is not necessarily a good thing, he said. Unlike the earlier days when Google or Facebook had little to no competition, today's categories are significantly overcrowded and companies now have to compete for the same talent and market. Senkut will focus on mobile as a platform, gaming, health care, and micro-transaction solutions.
Howard Hartenbaum, Partner, August Captial, says he's looking at startups that can weather the storm. These companies, says Hartenbaum, are more likely to build great companies. He warns that much fewer companies will be financed with debt--instead, they'll be financed with equity...and that plays much better to VCs than to angel funds.
Hartenbaum will focus on companies that demonstrate capital efficiency and ability to make money as a direct result of funding which means that in general, fewer companies seeking funds to develop a concept first will see funding.
What is common among angels and VCs is the sense of urgency and focus. Experimentation, at this point, is not a likely. Investors will look for clear proof points, solid business models, and companies that can demonstrate faster time to profit. Clear segments are bubbling up: health care and medicine is one. Mobile platforms (and I'll add, it must be cross-platform) is another. And we're bound to see more and more dabbling in the space of green and clean tech.
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