The opening panel at the Dow Jones VentureWire Technology Showcase focused on the current state of the venture industry and on what firms will be focusing in the coming year.
Bill P. Tai, General Partner, Charles River Ventures opens with a very clear statement: today, he says, the situation is “tougher than we’ve seen in our investing lifetime.” Tai says companies that will show up in Charles River Ventures’ portfolios are those born in recession while 4-5 year-old companies will have to make a strong cultural adjustment. “It’s a set of mini rolling depressions happening all at once.” Says Tai. “ It’s bad.” But, on the positive side, Tai says there are opportunities going forward. It can be a good time for entrepreneurs and investors in funds. “If you look at the return on venture funds invested during recessions, those are the best returning vintage years of all funds.” Says Tai. The markets are bigger than they ever were, there’s greater availability of high quality people, and companies can operate at lower costs. And, based on what we’ve seen in the past 8 weeks alone, since the (in)famous Sequoia presentation went public, there are going to be far fewer competitors compared to past years. “We’re in a period where there’s going to be transformational businesses that can be formed and the ones that will see this through are going to survive.” Concludes Tai.
Basil Horangic, General Partner, North Bridge Venture Partners says things change by the week but it’s clear that there’s going to be less money. Most capital-intensive projects are going to have the hardest time raising funds. Those companies who launched in the last 6 months are the luckiest because they have cash for now. The tough ones, says Horangic, are the ones funded 12- 18 months ago and are already well into the cash they raised and have established a burn rates.
Average exists this year have been primarily for companies with 6-8 years in the market, says Horangic. It is a “self correcting problem” he points out. Those who “don’t have the stomach for this” will exit. I’ve been saying for a while that there’s definitely ‘fat’ to trim in the startup world. Lots of technologies that simply don’t make sense as their own business. “We’ll see both entrepreneurs and VCs existing the business.” Says Hoangic.
David Cowan, Managing Partner, Bessemer Venture Partners agrees that there’s going to be less money available. “As we make tradeoff between cash and growth, we tell them they need to move much more toward cash than growth,” warns Cowan. This can be discouraging because companies are used to drive toward growth, but what will drive equity value in a year from now is whether you are buyer or seller. Foundations who are cash-flow-even will be able to use stock to buy other companies at attractive valuations. Those who have to sell will have to settle for the lower valuation. The value of your equity will be determined by which one of these roles the company will be playing. For some companies it won’t be an option; for those with flexibility, Bessemer will encourage them to focus on cost. “That’ll drive a lot of buying decisions.” Cowan says. He adds that they are advising companies to spend less time worrying about what competitors will do around features and more on cost because competitor are just as cash constrained and are just as likely to cut down on feature enhancements.
Bessemer will be looking at companies who engage in highly efficient capital, have equity value out of high IP projects, focus on enabling technologies, and on cost reduction.
John DiFucci, Managing Director, JP Morgan says he is focusing on software in the public sector. “From an investor’s perspective we assume the worst and go from there.” He says. DiFucci is looking at Software or models like software. “Software is unique,” he says. The upfront license fee and maintenance fee provide a steady stream of revenue. And because most software companies focus on corporate offerings, it’s unlikely they’d see a decline in license renewals. In fact, he says, even in the worst economic downturns after 9/11 companies continued to spend on maintenance fees. They haven’t declined in years. This approach helps investors mitigating risk through a guaranteed maintenance stream.
Mark Mahaney, Analyst, Citi says display advertising can go negative and Search advertising may grow in low double digits, particularity in search and retail. The bar for a company in the internet space to go public, says Mahaney, is exceptionally high but, he cautions, it doesn’t mean someone can’t break through it. Mahaney says 1% growth in commerce, 5-6% growth in Travel speak volumes about lack of innovation in the internet space.
What will VCs forces on now?
Basil Horangic highlights social networks and virtual worlds. He says there are a number of companies that are doing very well in that space (names not made public). “ There are real companies that are ramping fast. We’re seeing a lot of innovation at the lower end of the stack.” Horangic also points to developments in the energy market, medical devices, and medical imaging.
David Cowan says his firm will invest in consumer internet. “There are still great opportunities for success,” says Cowan. “Even if entire markets come down 20% in size due to decline in consumer spending, companies still look at phenomenal growth rate.” Essentially, Barry points out to the overinflated valuations we’ve seen in the past 2-4 years—the ceiling is still high even if it’s lower than it used to be. Venture firms are structured to invest in companies that take that long to see exists—5-7 years is an expected duration for growth. Cowan says he anticipates greater focus on international investments: startups in India, Europe and elsewhere may make for much more attractive investments in this climate. Not to mention the number of new consumers and businesses in these emerging economies they will be serving.