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.
p>
