During the darkest moments of the current financial crisis last January, some Boston entrepreneurs questioned whether they need to put off start-up timetables. They wondered if venture capital firms would retrench and wait for the economy to recover before funding any new businesses. People cringed at the news in January about CalPERS, perhaps the largest venture capital limited partner in America, having put out the word that it wished to withhold any additional venture contributions for a while – even those to which it had made earlier commitments. Rumor had it that VCs would forego new A-round investment opportunities in order to have funds available for second and subsequent funding rounds for their present portfolio companies. Had initial financing for Boston startups by VCs really dried up?
A panel discussion of prominent Boston VCs held on Boston’s Beacon Hill answer with a qualified “no.” The distinguished panel included Jonathon Seelig of Globespan Capital Partners, David Aronoff of Flybridge Capital Partners, and Larry Bohn of General Catalyst Partners with several other prominent venture capitalists and angel investors attending and participating in the discussion. They painted a somewhat more nuanced picture of the 2009 outlook. Here are some of the points I took away.
- CalPERS notwithstanding, the vast majority of venture limited partners (LPs) – the primary source of VC investment money – will continue step up to their contract commitments to fund future rounds. CalPERS is a special case with vast market power.
- Over the last decade, despite historically high levels of VC investment, returns have lagged. Most LPs, like the rest of us, are heavily invested in depressed equities and sitting on the venture sidelines for now.
- Whether a particular VC firm has capital to invest in A-rounds depends in large measure on when they raised their last fund from LPs. The situation varies considerably from firm to firm; some have substantial amounts remaining to invest, others have cancelled new fund-raising for now.
- Several VCs agreed that they are more likely to cut off funds to their under-performing portfolio companies, to avoid “putting good money after bad” than to stop investing in new opportunities entirely.
- Tight money means lower valuations, stricter scrutiny of risk and more smaller deals in the $1 million to $3 million range – with syndication of even these deals.
- The VCs in attendance continue to seek cleantech opportunities (though the precise definition remains elusive) as well as selected life sciences and communications ventures.
For Boston entrepreneurs, the message is mixed. Substantial venture capital remains available for initial funding of start-ups, though conditions are less than ideal. Start-ups must compete for initial funding and expect somewhat lower valuations and tougher terms. Competition for ongoing funding in later “go-to-market” rounds may be sharper too. The best startups with well-researched business plans, experienced managements and promising prospects still have a fighting chjance in 2009. If you are one of those, look for VC funding with genuine value-added funding, such as connections to key customers, suppliers, advisors and experienced executive staffing. You may well need that help. Good hunting.
Tags: A round, angel investors, Boston VC, Boston venture capital, business plan, CalPERS, David Aronoff, depressed equities, flybridge capital, future rounds, general catalyst, globespan capital, Jonathon Seelig, Larry Bohn, limited partners, portfolio companies, second round, VC, VC funds, VC funds available, venture funding, venture outlook