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What Investors Are Looking For Now: AlwaysOn Venture Summit Concluding Thoughts

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.

What Investors Are Looking For Today: From The AlwaysOn Venture Summit

 

I'm at the AlwaysOn Venture Summit today where investors and startup CEOs gather to discuss the current situation and upcoming trends. The first panel is moderated by Lisa Buyer, Founder of Class V Group. She's asking the panel to discuss the current state of affairs in the investment sector.

Leslie Pfrang, Managing Director Deutsche Bank Securities: This is the most difficult time in the market. The only thing that worked are  "accidental heroes."

Jeff Matthews, General Partner, RAM Partners: The worst market I've ever seen and the worst since the 1970's. Back then, Metthews says, one smart investor from Omaha bought all the stocks he could--Warren Buffet--and he became one of the greatest investors. Matthews just published a book about Buffte's success.

About Cash

Pfrang: We could see cash flowing back into equity. Selling has dried up.

Matthews: Even large hedge funds that thought they had enough cash and were prepared; they are still faced with redemptions even at the November 15th deadline.

John Rende, Partner, Prism Partners: Markets are driven by sediment, redemptions...but there could be a tremendous amount of  money on the sideline.  The world hasn't ended as it may appear. You're seeing very high quality companies trading at steep discounts--what typically is the definition of a bear market compared ot what we saw in 2002--now can be looked upon as a correction for the previous years. 

Chris Nawn, Partner, Integral Capital Partners: We've seen stocks that are going to prices we didn't think were possible.

The Last 30 Minutes

Pfrang: People get their redemption notices and they program sell to raise the necessary amount  of cash. There's so much cash on the sideline and volatility on the market that there's a lot of chasing too which accentuates the move that wouldn't have otherwise happened.

Things are still getting worse. First call estimates are not even reflective of what the buy side or sell side have been reflecting. Buy side models are below street and first call. It becomes an expectations game at some point. Big cuts for 2009 are already in expectations. Valuation may be higher than people are thinking they are.

Matthews: We haven't seen the worst of it: we still have the last 2 weeks of the quarter to go. Late August September had tremendous fallout. People could not believe what was happening. Do you take numbers down based on a month, or wait to see what happens. That might explain the delay--large corporations like Intel and DuPoint came out later and in one day cut their numbers.

What About Hedge Funds?

Matthews: There will be a lot fewer of hedge funds in '09.

Pfrang: Still a high value proposition for endowments and pension funds.

Nawn: Hedge fund allocation isn't as dramatically over weighted as it is in private equity. You'll see some hedge funds who have come into the private equity road existing. Mutual Funds are probably not going to enter private equity and you'll see mergers in mutual funds.

What are we going to see with IPOs?

Pfrang: IPO in the online education space. That space has been performing very good. We happen to believe there's going to be growth in the second half of '09. People don't have trust in the numbers. They're looking for stability.

Nawn: We believe IPOs are going to stay low for a while. The bubble of 2000 you saw about 400. We look at the IPO market as a tool to let us know what we need to do about shorting.
It's going to be brutal: If you're the 6th or 7th player out there, you're not going to survive- especially if you're burning cash. MSFT came out early because they wanted to take advantage of a tax situation. The good ones will get out. The banks doing the bidding but the balance needs to move so that the pricing mechanism needs to move so that it benefits both buyers and sellers.

Matthews: Quality: There are many good public companies we can invest in, why risk investing in small, untested companies? Google is selling at X10 X12 times the earnings. Why take a risk on an untested IPO when I can buy Google which I understand completely.

Pfrang: In the short term, investments in new technologies is at a stop. Investments are directed more toward proven and tested technologies. We're looking into SW As A Service (SAAS), cloud computing, green and cleantech, and into smarter, faster networks.

Matthews: Also looking into iPhone as a software platform.