Filed under: angel investors, economy, innovation | Tags: innovation, long cold winter
The New York Times today added yet another article to the pile of depressing news on how this long cold winter just keeps getting tougher for entrepreneurs and innovators:
Angel investors are the optimistic financiers who give entrepreneurs their crucial first infusion of cash to bring their ideas to life. Now, in the midst of a punishing economic downturn that is sparing few companies, these patrons are cutting back on their bets and threatening the very foundation of the technology economy.
Unlike venture capitalists, angels invest small amounts of their own money — as little as $10,000 and usually less than $1 million — in very young companies. But like all investors, many angels suffered deep losses when the market plunged last fall.
That has left them skittish, investing in fewer technology start-ups and demanding more of those they do consider, leaving founders struggling to find money at the stage they need it most. The slowdown, entrepreneurs and investors say, could stunt the growth of new companies and have long-term effects on innovation.
Rob’s post on TechFlash in January highlighted the negative effects of a downtrodden economy on innovation (eerily similar to the Times article!):
The only good news for companies raising capital has come from high net worth investors and angel networks—but these pools of capital are reaching their limits. They cannot be expected to pick up all of the slack left by venture capitalists. So, as we move into 2009, we expect the companies “waiting it out” will finally launch fundraising efforts—and the demand for capital will significantly outstrip the supply. Angels won’t be able to keep up and the traditional venture community will remain focused on less risky deals and on reserving capital for existing portfolio companies. While I hope to be proved wrong, we are predicting that these trends will lead to continued loss of early-stage jobs and the unwinding of early-stage businesses. Worse, this will have a chilling on our Innovation Economy—shutting down a major engine of economic growth and job creation.
On TechFlash today, John Cook wisely pointed out, also in response to the Times article, that “getting a good read on the angel market is nearly impossible, since it’s a nebulous group of unconnected investors who don’t necessarily share similar philosophies.” He asked blog readers to share their thoughts on the current angel market, and opinions are mixed, surprise, surprise.
Posted by CharlotteGee
Filed under: economy, innovation, venture capital | Tags: long cold winter, venture capital
You can find Rob over on TechFlash, as a guest columnist for John Cook’s esteemed Venture Blog. Rob’s piece, titled “Government should support the innovation economy,” provides a bit of the good, the bad and the ugly (but never fear … it ends on a somewhat positive note).
An (ugly) excerpt:
So, as we move into 2009, we expect the companies “waiting it out” will finally launch fundraising efforts—and the demand for capital will significantly outstrip the supply.
Angels won’t be able to keep up and the traditional venture community will remain focused on less risky deals and on reserving capital for existing portfolio companies. While I hope to be proved wrong, we [at Faultline Ventures] are predicting that these trends will lead to continued loss of early-stage jobs and the unwinding of early-stage businesses.
Worse, this will have a chilling on our Innovation Economy—shutting down a major engine of economic growth and job creation.
Check out the entire post to see how we might be able to uncover some of the good.
Posted by CharlotteGee
Filed under: politics, start-ups | Tags: long cold winter, Obama Administration, venture capital
For those who aren’t following the Obama Administration Cabinet Appointment Ticker, the story is out that a venture capitalist will be appointed SBA Administrator. In the context of all our recent posts on the challenges facing small businesses, this could be a good sign that the new Administration is going to try to stimulate the early stage market. The Sun is out again and we are trying to find good news to report.
Mills is a venture capitalist and a founding partner of the New York-based equity firm Solera Capital. She has been an adviser to Maine Gov. John Baldacci on economic matters. She’s also president of the MMP Group in Brunswick.
Posted by RobC
Filed under: economy, start-ups, venture capital | Tags: capital gap, economy, innovation, long cold winter, Obama Administration, seattle, start-ups, venture capital
The snow storm that has left Seattle immobilized (the schools were closed a day *before* the storm, just for good measure) has created the perfect cold, wintry environment to read the just released National Venture Capital Association survey. It confirms the icy predictions we’ve been making over the past month – things do not look good for start ups and early stage companies in 2009. In fact, for those that will need the capital markets, things look quite bad.
Respected Seattle business journalist John Cook comments on the NVCA report:
I’ve been informally conducting my own survey of VCs, lawyers and entrepreneurs around town. The message I am hearing is not pretty, with one VC saying that nearly everyone is hunkered down. Long-time tech entrepreneurs such as The Cobalt Group’s John Holt and Jobster’s Jeff Seely have told me recently that it is about the worst economic environment they have seen.
The general feeling is that the capital markets may be shut for another 12 to 18 months, meaning that startup companies will have to learn to exist on the fumes of their previous venture rounds or get to profitability sooner than anticipated.
Running on fumes… Wow. I made the mistake of using that line with several start up CEOs recently and they almost took my head off. “What do you think we’ve been doing?” “We don’t have any fumes left… we ran out in the third quarter”.
Without access to capital many of these early stage companies won’t make it to the next gas pump. Unfortunately, with news like this NVCA survey and Coller’s Global LP Barometer, it doesn’t sound like the capital markets are going to show any sympathy.
Sure, there may be bigger problems out there. But when billions of dollars are spent to bail out industries that need to shed jobs, it is troubling to see the innovation and job creation engine of our economy seriously threatened by a lack of relatively small amounts of capital (mere rounding errors to the Treasury’s bailout accountants).
Posted by RobC
Filed under: capital gap, economy, start-ups, venture capital | Tags: capital gap, economy, long cold winter, start-ups, venture capital
Consistent with what we’ve been predicting offline, the WSJ reports that a critical number of institutional investors are reporting their private equity allocations to finally be met or exceeded. The article references Coller Capital’s periodic (and always interesting) Global Private Equity Barometer:
One of the big drivers of private-equity investment seems to be running out of steam, as research shows two-thirds of investors expect to reach or exceed their target private-equity allocations by the end of next year.
A survey of 107 investors by Coller Capital, a so-called secondaries firm that buys stakes in private-equity funds from investors, found 66% of investors expected to reach their target private equity allocations. The total included the fifth of respondents who expected to exceed their target allocations.
In their report, Coller goes on to say that institutional interest in private equity hasn’t decreased — just their ability to play:
The problem for investors is not appetite, but stretched allocations and a shortage of cash.
Portfolio management is predicated on ratios — and since the public equity market has tanked, the private equity allocation has grown larger as a percentage of the pie. What this doesn’t take into account is that the private equity valuations often trail the public markets (and significantly — by definition and design, they do not have the volatility of publicly traded, highly liquid securities).
So, for venture capitalists looking to go back to market for new funds and early stage companies looking to raise new capital, this news might add a few months to their long cold winter. We don’t know exactly how this will play out, but the net effect doesn’t look promising:
- It will (at best) not be a good year to raise a new institutional venture fund;
- Because of the uncertainty of the markets, compounded by the lack of new capital coming in (see #1), existing VCs are going to be extremely hesitant to place new capital; and
- So … start-ups are going to have a really really hard time getting capital, growing and perhaps even surviving.
Time to invest in a nice warm coat, gloves and hat … ?
Posted by RobC
Filed under: innovation, private equity news, venture capital | Tags: economy, health policy, innovation, long cold winter, politics, start-ups
Our methods are not scientific and I don’t know what you can reliably extrapolate from our results, but you heard it here first: It is already a very cold winter for health care start ups.
In the past week, I have received numerous calls from companies either (1) suspending their fundraising activities and cutting back to bare bones operations or (2) flat out closing up shop. After nearly 15 years in and around venture capital, I have never seen so many interesting, well positioned companies go through this existential crisis at the same time (not counting the decimation of waves of nonsensical business models in the early 2000’s).
Perhaps it is an effort to clean things up before the end of the year, but I am not so sure that what we are experiencing now isn’t a harbinger of much worse things to come. A few trends worth considering:
1. Waiting it Out. Many early stage companies pulled (or never launched) their fundraising efforts during mid-2008, hoping to relaunch in early 2009.
2. A Dustbowl. By all reports, venture capitalists with “dry powder” have pulled back and are sitting on their hands waiting to get a handle on the cash needs and time to exit for their current portfolio companies. Not that there has been much venture for early stage health care companies recently anyway, but this is creating a veritable Dustbowl.
3. A Dustbowl, Inside a Chasm? Not only is the industry segment traditionally (and especially now) underventured, but there is little capital for the size of deals needed by early stage health care companies. These companies need $500,000 to $5 million, but few if any are placing this kind of capital in health care start ups (much easier to raise $10-25 million, even in this market). This “Capital Gap” is a big problem, and will be hard to address with the capital and investors in the market now. Larger fund sizes mean larger deals – and most firms with long term health care specialty have been raising much larger fnds. And for funds that have been dabbling in the early stage, opportunities to move up the risk curve to positive EBITDA deals is very attractive in this market.
4. The Limitations of Angels. The only good news for companies raising capital this fall has come from regional angel networks – but these pools of capital are limited and often regional in their focus.
So, as we move into 2009, we expect to see the companies that have been trying to wait out the market finally launch fundraising efforts out of necessity – and the demand for capital will significantly outstrip the supply. Angel networks won’t be able to keep up and the traditional venture community will remain focused on less risky deals and reserving capital for their existing portfolio companies (which may not see an exit for much longer than originally expected).
While I hope to be proved wrong, we are predicting that these trends will lead to the continued loss of jobs in early stage businesses and potentially the lack of introduction of new innovation into the health care market over the next 12 months. The good news is that well capitalized businesses will have a hey day in this sector, as there is considerable opportunity to build and grow health care services companies in this market (even industry novices can pick up on the increasing clamor for efficiency, quality and cost effective access – all require new, technology driven solutions). But without the proper capital, there is certain to be a chilling effect on innovation and growth.
Sadly, I expect to be getting more phone calls from entrepreneurs scaling back and shuttering operations during this cold Winter… which might last well into next Fall…
Posted by RobC