Venture Capital–The Reality
Published by Bob Foster
Mainstream media, in its search for bad news, seems intent on trying to lead readers into thinking that Venture Capital today is all but non-existent…and that any entrepreneur who is looking for VC money is on a fool’s errand. However, let’s look at the reality of Venture Capital investments.
Obviously, there are fewer IPOs during the present turmoil and condition of the stock market, but this simply means that Later Stage companies will have to wait a while longer before cashing in on their big “payday.”
The good news is for startups. Investment in Seed Stage companies increased substantially in 2008, with a 19 percent jump from the prior year. There was also about the same investment in Early Stage companies during 2008 as there was in 2007.
Money invested in Clean Technology grew more than 50 percent in 2008, and investments in Internet-specific companies remained at about the same level as 2007. VC investments in the categories of Energy, Media and Entertainment, and IT Services grew during 2008, while several other categories remained about the same level as 2007.
It is true that; overall, the total amount of VC money invested was down about 8% in 2008–due largely to a decline in Later Stage and Expansion investments. This is likely due to everyone waiting out the stock market before they crank up the IPO machine again. Total number of deals in 2008 was only down about 4%.
So, with the President arranging for more capital to become available to loan to small businesses, Congress pumping up the economy, and Venture Capitalists continuing to invest at close to their normal rate, there should be no reason for entrepreneurs to put off starting a business, or growing a business. Put aside the fear and get on with it!
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5 Responses to “Venture Capital–The Reality”
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This is encouraging – and actually makes sense, since it would seem that VCs with some funds to invest would rather take a gamble with a solid business plan than with the market these days!
Jeff – You’re absolutely correct. When a VC makes a commitment, there is very good assurance that the business plan, and all individuals involved, have been thoroughly vetted–against the current market. This approach is much more likely to succeed than someone who just tries something to see if it will work.
Thanks for the comment–they are always welcome.
Bob Foster’s last blog post..Venture Capital–The Reality
Thanks Bob for coming by the SAMBA blog and leaving a comment for the Startup Myth post. I appreciated your passionate analysis. This post you wrote about Venture Capital is very appropriate to our discussion.
I have to agree that it was youth that caused me to paint “such a bleak picture of ‘startup’ entrepreneurs.” But maybe not naivete.
I can only speak from experience and what I’ve been exposed to. I was part of the founding team of a small venture fund we created while we were undergrads in 2002. Our portfolio achieved two gigantic exits through IPOs on the NASDAQ. I would say the entirety of my “entrepreneurial” experience has been with young technology startups that intend to grow. I haven’t worked with any “solo entrepreneurs.”
Our investing success, which has made a ton of money for our investors and ourselves, rested on making a judgment on the entrepreneur. I looked for CEOs who aimed to grow a “startup” as quickly and as profitably as possible. We don’t want our investments to stay perpetual startups. Our definition of success equals growth.
I also ran into a lot of entrepreneurs who came pitching for funds that clearly fell in love with the “startup” myth. As investors, we wanted to avoid these people like the plague. They can build a lifestyle business on someone else’s dime. We are in it to maximize our profit by betting on entrepreneurs who could scale and dominate a market segment. Our fiduciary duty demands that.
You and I probably agree on more things than disagree. I am actually arguing against the noodle-eating-sleepless lifestyle. Initially, it is a necessity for those of us willing to bear great financial risk to build thriving enterprises. I’m reminding this subset of the entrepreneurial population to get real and grow beyond the initial lean stages into powerful behemoths. Or pack it up and go home if you cannot grow. Is that too harsh?
I will probably run a “solo” entrepreneurial act one day, in between hyper-growth ventures. My father ran a small grocery store when I was a little child. I loved working the register. My mother ran a small sewing factory, I loved ironing newly sewn garments. I salute all small business owners throughout the country; they are the bedrock of our economy.
Allan’s last blog post..The Startup Myth
Alan – Thank you for your insightful comment. Knowing that you are speaking from the position of Venture Capital, I can see how your views of startup entrepreneurs would develop. I have been involved with VCs in many different settings, and have also seen people with “stars in their eyes,” living a false sense of entrepreneurship. Sadly, most of these folks will never make it. So, I can appreciate the kind of startup person you are talking about, and the difficulty you have in finding the few who are capable of building “…scale and dominate a market segment.”
However, it would also be rare for a purposeful small-scale entrepreneur to ever contact a VC, as any growth they have would come via their business or savings. One must realize however, that this is the vast majority of businesses. Of the approximately 30 million businesses in the U.S.—99.7 percent of them have 20 or fewer employees, with 70 percent having no employees at all. Venture Capitalists work with a very small segment of the U.S. population of enterprises. As you so aptly said, “I salute all small business owners throughout the country; they are the bedrock of our economy.”
On another subject, I would really like to hear your view—and those of other Samba members—on the declining Innovation in the United States. I have done two posts of a series I am doing on this subject. The first post presented the decline of Innovation in the U.S. compared to 40 other countries in the world. The second post presented those things the government can do to help the problem. The next post I do is going to fly in the face of high-tech, and probably Venture Capitalists. So, if you can work it into your schedule, I would like to hear what you folks think about Innovation in the U.S.
Thanks again for your comment—as always, it is appreciated.
Bob Foster’s last blog post..Venture Capital–The Reality
Bob – Happy to give feedback but can’t speak for the rest of the SAMBA crew. You have my email. Thanks
Allan’s last blog post..The Startup Myth