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.

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.