Venture Capital News
Since our last post on the state of the venture capital market, the industry has seen even more bad news emerge. A July 1 report issued by VentureSource, a research company focused on the venture capital industry, showed that liquidity in venture capital investments for the second quarter of 2009 fell 57% when compared to the same period last year. The report called the quarter “one of the worst for venture capital-backed liquidity since the doldrums of early 2003.” The entrepreneurial spirit, however, abhors a perceived piling-on of pessimism, and is, by nature, guardedly optimistic; this optimism is reflected in a survey of sentiment among venture capital professionals released on July 9 which showed, despite the gloomy figures for the quarter, a marked increase in confidence among industry figures. The survey noted that while the effects of the financial market disruption on the venture industry will linger for some time, most [venture capitalists] observed an increasingly determined and talented pool of entrepreneurs and a continuing march of innovation.” Similarly, Scott Austin, the author of the Wall Street Journal’s Venture Capital Dispatch, declared the second quarter figures released by Venture Source a “healthy surprise.” While he noted the dramatic (and not entirely unexpected) decline in liquidity for venture capital investments, he believed the numbers evidenced that “investors are putting money to work in health care, with big gains [in terms of investment] occurring across the board in biopharmaceuticals, medical devices, health care services and medical software and information services.” (http://blogs.wsj.com/venturecapital/2009/07/15/expect-a-healthy-surprise-in-2q-venture-funding-report/)
Venture capital managers are not only contending with difficult market conditions; they are also facing the possibility of increased regulation. Legislation that would require venture capital management firms to register as investment advisers with the Securities and Exchange Commission is gaining momentum in Congress. Among other things, this would subject managers to extensive recordkeeping requirements, requirements governing the manner in which investor assets are custodied, restrictions on managers’ ability to receive performance-based compensation from a fund (such as the “carried interest” allocation customary in the venture capital context) and periodic examination by the SEC staff. Although primarily targeted at hedge fund managers, the investment adviser registration requirements currently supported by the SEC and the Treasury Department would include managers to venture capital and private equity funds within its scope.
Industry professionals as well as representatives from the National Venture Capital Association (or NVCA), the venture capital industry’s main trade association, have appeared before Congressional committees and government agencies argue that venture capital managers should be excluded from the scope of the legislation. These professionals and representatives argue that the potential failure of a large venture fund does not pose the same systemic risk to the U.S. economy as that of a major hedge fund, given that venture funds are not leveraged like hedge funds. In addition, they argue that the activities of venture funds make them less likely or able to engage in the misdeeds Congress seeks to prevent, since venture funds do not “short” stock, do not engage in short-term trading and do not purchase or sell publicly-traded securities that would be most subject to manipulation. As a result, the venture capital industry believes that SEC oversight of venture fund managers is unnecessary, and the resulting burden upon an industry essential to the American economy would outweigh the potential benefits gained or harms prevented. Stay tuned for more to come!
101 on Venture Capital
Filed Under: 101, Capital
Tags: Capital, Entrepreneur, Venture Capital
Venture capital investors play an integral role in the development of start-up companies by providing needed funds to high-risk, early-stage companies with strong growth potential. Venture capital investors provide entrepreneurs with initial seed money and additional financing at various stages of the often fast-paced growth process, with the ultimate goal of either taking the company public in an initial public offering (an “IPO”) or selling the company to, or merging it with, a larger, an established industry player.
Current economic conditions, however, have brought venture capital investments to the lowest level in years. The small, high-growth firms which benefit most from venture capital are particularly susceptible to downturns in the broader market, making what are already perceived as high-risk investments in such companies even riskier. As a result, new venture capital fundraising is down significantly to just a fraction of funds raised in previous years.
In addition, the two traditional means of achieving returns on venture capital investments (an IPO or a sale to a larger company) are largely unavailable. The IPO market has come to a near standstill, although some are forecasting marginally increased activity later in 2009. The market for mergers and acquisitions has similarly declined. As a result, venture capital investors are unable to exit their current investments, and, if an exit is possible, it will likely represent a substantial or total loss, further chilling the market for new venture capital investments.
A new group of secondary investors is emerging to pick at the carcass of current venture capital investments. These investors purchase the interests of current venture capital investors at a substantial discount, hoping for later gains when the IPO and mergers and acquisitions markets thaw. This secondary market at least provides some liquidity to those currently stuck in venture capital positions.
Despite this dour news, there is some reason for optimism. There is evidence that corporate acquirers are taking tentative steps to reenter the market for start-up operations, albeit on conservative terms. Some larger companies are using these difficult times to make strategic purchases of start-up companies, as evidenced by Google’s recent creation of a $100 million venture capital fund. Click on the link below for information about the Google venture capital fund http://blog.delawareinc.com/2009/04/google-launches-a-venture-capital-fund/. In addition, well-positioned emerging companies are increasingly taking advantage of the distressed balance sheets of public companies, acquiring technologies and operations from these companies at a relatively depressed price. This practice was virtually unheard of before the current downturn.
In short, while the current state of financing for start-up companies is glum, the market for innovation and high-growth companies will return. The entrepreneurial spirit has and always will survive difficult markets, and investment assets invariably seek out the brilliant new cutting-edge companies and innovations that will shape the future.
Google Launches a Venture Capital Fund
Filed Under: Articles of Interest, Capital
Tags: Capital, Entrepreneur, Google
After much speculation Google has officially announced their new venture capital fund. They expect to invest up to $100 million dollars in it’s first year; this is fantastic news for all of you entrepreneurs with great ideas looking for capital. Your idea may very well be “the next big thing” that Google is looking for.
Below is the announcement on the Official Google Blog:
Today we’re excited to announce Google Ventures, Google’s new venture capital fund. This is Google’s effort to take advantage of our resources to support innovation and encourage promising new technology companies. By borrowing the best practices of top-tier, financially focused venture capital firms and bringing to bear Google’s unique technical expertise and brand, we think we can find young companies with truly awesome potential and encourage their development into successful businesses.
At its core, Google Ventures is charged with finding and helping to develop exceptional start-ups. We’ll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven’t thought of yet. Central to our effort will be our fellow Googlers, whom we view as a critically important resource to help educate us about potential investments areas and evaluate specific companies.
Economically, times are tough, but great ideas come when they will. If anything, we think the current downturn is an ideal time to invest in nascent companies that have the chance to be the “next big thing,” and we’ll be working hard to find them. If you think you have the next big idea, or if you just want to to learn more, please see our website at www.google.com/ventures.
If you’re just starting your business now, in 2009, where do you raise money?
Filed Under: Capital, Founder's Forum, Q&A
Tags: Capital, Investor
Banks aren’t lending, venture capital firms are now effectively hedge funds, and American angels are about to be slammed by the crashing market and expected tax increases on capital gains, the source of angel investment power.
Money has never been easy to raise when you’re selling a dream… presented confidently as a vision — for the first time. If it were easy everyone would be doing it. The key to understanding and surviving this process is to realize that, “It isn’t SUPPOSED to be EASY!”
The lessons learned from REJECTION reveal the logic that eventually leads to long term SUCCESS. Others have described this as “having to learn to crawl before you can learn to walk”, but it’s not that elementary. It’s a simple reduction process, which allows only the most clever and detail-oriented to survive. The innovative, the committed, the determined and the clever each find that they must, in fact, be ALL of the foregoing to survive. Any single qualification would not be enough. The term “competition” provides inspiration as well as deep seeded fear. One learns that they must deliver competitively and that with every presentation excellence is expected.
In order to get money from an investor, you MUST ask them for the money and you need a presentation to ask an investor for money. The first presentation you give will be your last if you fail to impress. You must answer the usual investor questions up front, but primarily you should set your “vision” in the mind of the investor. Where are you going? Is the first question the investor wants to know after he understands what it is you want to do and how you plan to get it done.
Once you’re successful, you can reminisce with joy about the lucky breaks you got that lead to your success, and minimize the effort it took you to become successful — others will love you for it. But to BECOME successful, you need to work at it like the best professional athletes work out. Work is taken for granted. Amazing feats are taken for granted. Scoring continually is taken for granted. Even winning is taken for granted. The only effort that counts is EXTRA effort. If you can LOVE that, you’ll be successful during these tough times.
