What Do VCs Say and Do in Early-Stage Today?

Written by Bernard Lunn / April 30, 2009 5:00 AM / 30 Comments

This post is part of our ReadWriteStart channel, which is dedicated to profiling startups and entrepreneurs. The channel is sponsored by Microsoft BizSpark. To sign up for BizSpark, click here.

In the last two months, we have interviewed six VCs. In each case, we asked the same question: "How is early-stage financing doing during this downturn compared to the last one in 2001/2002?"

In this post, we consolidate all the responses, to see if a consensus among VCs emerged. But we also dig a bit deeper. We have been tracking Series A deals since the global financial crisis started. There is some concern that VCs are not walking the walk, that they say all the right things about investing through a downturn, but they may not actually do those things. In this post, we shine a light on that question.

Which VCs Have Been Talking?

Here are the VCs we have interviewed so far, with links to the original posts:

Brian Jacobs, Emergence Capital (Silicon Valley)
Phil Black, True Ventures (Silicon Valley)
Dave McClure, Founders Fund (Silicon Valley)
Paul Jozefak, NeuHaus Partners (Germany)
Alok Mittal, Canaan Partners (India)
Albert Wenger, Union Square Partners (New York)

What VCs Say

According to what they say, all is well. Well, at least better than the last time. Much, much better. But what is good for VCs is not always good for entrepreneurs. When VCs say, "Deal flow is good," that translates for entrepreneurs into, "You have more competition." When VCs say, "Deal terms are looking more reasonable," that translates for entrepreneurs into, "You will have to dilute a bit more in your first round."

Here is our summary of the key points made by VCs:

Starting a Web venture has dramatically reduced in cost. Everybody remarked this. Albert Wenger quantified it as 10 times a reduction.
Professional angels are still active. They are experienced and, with the dramatically lower cost of starting a Web venture, their fewer dollars stretch further. In the last downturn, their investments were decimated because they were all in the same dot-com bubble stocks. This time around, their risky public market bets on Google and Amazon turned out a lot better than the safe investments in banks and car companies!
Entrepreneurs are more experienced. This was the major factor cited by VCs outside the Valley (i.e. this has always been true in the Valley, but it is now true in other centers as well).
Everybody knows the history and has seen that the best deals are done during the downturn.
The short-term economic issues are irrelevant to a startup that has three to five years before an exit. Paul Jozefak put it nicely, saying this is a nice quiet time to build something: "Going into the office at 7:00 am when nobody is there, you can get a lot of work done."

What VCs Do

On April 17th, the MoneyTreeâ¢ Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters, reported numbers for the first quarter, with this headline:

"Venture capital investment plummets in Q1 2009 to 12-year low"

The gloomy macro numbers conflicted with what we were hearing from VCs and entrepreneurs. So, we drilled into the numbers a bit and came to the conclusion that the trend was down (surprise, surprise) but not "falling off a cliff." Fred Wilson at Union Square Ventures also dug in a bit and found some fascinating regional variations.

The NVCA is a rigorously compiled survey. Any VC fund that is a member of the NVCA reports its deals to it. But the NVCA does not publish about individual deals (which VCs invested in which ventures this quarter).

We have been trying to track this in our very specific niche, early-stage for Web technology ventures, and have been reporting on this as the A-Team (Series A financing).

Here is what we found in this quarter. First, a health warning. This has been compiled with limited human resources based on publicly available free sites, but we think we are at least in the same ballpark. MoneyTree reported $134 million, and we found $131 million. Some of that $131 million comes from outside the US, so this is not quite apples to apples.

Who Has Been Walking the Walk?

Almost all of the VCs we interviewed have done a deal this quarter. Emergence did two in the previous quarter but none this quarter.

We count 59 VCs that have done a deal since the market crash; that is, 59 investors that have done a Series A deal with a Web technology venture. That is a lot of investors. And we have surely missed some. But we can see 59 VCs that clearly have been walking the walk since the market crashed in September.

Even more impressive are the 10 VCs that each did two deals. Note that, (1) these VCs may have done more Series A deals in other sectors, and (2) they may have done Series B or later deals in Web technology. We are tracking only the niche of Series A in Web technology.

The 11 Double-Hitters

In alphabetical order, here are the 11 VCs that did two or more Series A deals in the Web technology space since October 2008:

A number of firms, including Union Square Ventures and True Ventures have done more than 2 Series A deals in this period.

Who Has Data on Angel Financing?

The really big gap, which nobody tracks (as far as we know), is angel financing. An angel investor is normally not a member of the NVCA. Tracking these deals would give us the real insight into the top of the innovation funnel. Anybody know of good sources for this?

What Big Trend Jumps Out?

In a word, competition. VCs face more competition. This is specific to Web technology. The fundamental driver for this is the 10-times reduction in cost of starting a Web technology venture. VCs see more competition from:

Experienced serial entrepreneurs who can use a small amount of the cash they got from selling their last venture. They may want VCs, but they don't need VCs.
Professional angels who are ex-serial entrepreneurs and can now work either independently or with peers to put together a big enough round to fund a Web technology venture.
Other VC funds that have tended to focus on later-stage investing because they perceived it as lower-risk. But many of those deals tended to depend on short-term trends in debt financing and IPOs, both of which are moribund right now. So, these VC funds are getting more active in early-stage.

All of this is great news for entrepreneurs!

The VCs we spoke to were comfortable with this increased competition and had all taken specific actions to thrive in this new environment.

It is unclear what this all means for the "Big VC," the top-tier firms that are household names. They have multi-billion-dollar funds to deploy. This new capital-efficient environment is a bit more of a problem for them. Some of them may move to clean tech or bio tech, where big dollars are needed just to get a product to market.

But we're not tracking that. What Web technology entrepreneurs need to know is, "Which ventures similar to mine are doing deals, and what are they thinking?" This is what we're tracking.

What About This Quarter?

What will the headline be when second quarter numbers are reported in early July?

The month-to-month trends from Q1 look good:

January: $30.3 million,
February: $45.5 million,
March: $55.7 million.

If April is better than March, we may be seeing a good trend. Stay tuned...

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Comments

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I read this post with interest; thanks for putting together all this data. I work as an associate at Union Square Ventures. While I can't comment on the VC industry as a whole, I have some feedback regarding practices/data at Union Square Ventures. I've got three comments:

1. You list 10 "double hitter firms" defined as firms that have made 2 Series A investments since October 2008, but you don't include Union Square Ventures. I just wanted to make clear that we've made 3 Series A investments since October 2008 (AMEE, Boxee, and Simulmedia), and we also made a fourth Series A investment in mid-September (Zemanta) and we have a signed term sheet on a fifth Series A investment which we hope to close shortly. So, we are continuing to make early stage investments at a pace consistent with our average over the life of our firm. If anything, one could say we are accelerating our early stage investment pace slightly, but that's probably due to the fact that we are still pretty early in the lifecycle of our newest fund, which closed in June of 2008.

2. You wanted a good source on "Angel" investing. The best source I can find for this data is using the "Advanced Search" page on CrunchBase and focusing on financing criteria. It's not ideal and the data is not as clean as sources like VentureSource, but it's the best thing I've found for covering angel investing activity.

3. Regarding this statement from above: "The NVCA is a rigorously compiled survey. Any VC fund that is a member of the NVCA reports its deals to it." That's not entirely true. NVCA surveys are not compulsory for NVCA members. I don't know what the actual completion rate of NVCA surveys are, I hope someone from the NVCA drops by this thread and comments.

Posted by: Andrew | April 30, 2009 7:50 AM

Andrew, thanks. My bad on missing USV from the double hitters. I have corrected that and pointed out that some firms, including USV, have done more than 2.

Thanks for the input on sources of data for angel deals and about NVCA surveys. As somebody who studied History at College it always interesting to understand sources!

Posted by: Bernard Lunn | April 30, 2009 8:04 AM

Very helpful and enlightening. I Have a question though: what do you mean with Series A or B deals? Is there a specific definition on them. Thanks a lot!

Posted by: Cristóbal Rivas | April 30, 2009 8:10 AM

Very helpful and enlightening. I Have a question though: what do you mean with Series A or B deals? Is there a specific definition on them. Thanks a lot!

Posted by: Cristóbal Rivas | April 30, 2009 8:12 AM

Christobal, you can Google to get more on Series A, B, C. In simple terms, first round, second round....

Posted by: Bernard Lunn | April 30, 2009 8:15 AM

Here's my take on this:

It seems that every other day there’s a new story that surfaces regarding the venture capital model. The argument can range from the completely pessimistic point: “Venture capital is dead,” to an optimistic look, “Venture capital isn’t dead, entrepreneurs just aren’t performing.” Usually the optimistic view is hammered with data and angry individuals declaring the view absurd. Really, no one knows what’s going to happen.

The most level-headed perspectives have actually come from venture capitalists. Fred Wilson, for example, has communicated the disenchantment held by his limited partners to the world: http://www.avc.com/a_vc/2009/04/the-venture-capital-math-problem.html

In the end, venture capitalists are finally understanding that there’s not only a problem, but that it’s not just the economy at the root of the problem Basically, we’re on the foot of the mountain named, “Change.”

- Scott from http://scottdig.com

Posted by: scott Scheper | April 30, 2009 8:22 AM

Bernard, thanks for this excellent posting.

Social Media and Internet companies with minimal capital requirements don't fit well with the traditional VC model and A round investment size.

An evolutionary response may be for VCs to develop, or partner with, incubator/accelerator groups and structure social media/internet/casual gaming funds matching the investment requirements of tis segment (e.g. more, smaller investments at an earlier stage, with greater mentor and coaching support), while maintaining traditional fund activities and roles in other investment areas.

Regarding sourcing data on Angel activity here are some sources:

http://angelsoft.net/industry/index.seam

http://www.angelcapitaleducation.org/dir_research/research.aspx

http://www.angelcapitalassociation.org/default.aspx

Posted by: Ian Hand | April 30, 2009 9:56 AM

I had the same question that christobal had.. and now its clear

Posted by: Ferry | April 30, 2009 10:50 AM

Bernard,
don't know if your list was meant to be comprehensive, but if so you have missed our fund, New Atlantic Ventures (www.navfund.com), based out of the DC area (Reston, VA) and Boston area (Cambridge, MA). We invest in early stage deals in new media, mobile, software as a service and breakthrough technologies.

Historically we have funded some of our best deals during down times (Divx, Mobile365, Massive, Globallogic). Since October, we have closed 4 Series A deals: TVU Networks, Koofers, Secure Command and FashionPlaytes.

Posted by: Thanasis Delistathis | April 30, 2009 10:57 AM

The Angel Capital Association tracks Angel investmnets.

In addition, there is an ACA / NVCA initiative to increase collaboration in the venture funding community on early stage investing, increase the sophistication when engaging with Founders in making a seed investment, help ensure the better quality ventures are funded, expand the options to prudently manage the high risks inherent in this business, and improve the probability of venture success with a high ROI for stakeholders.

Because of these significant benefits, as an active Angel, I would appreciate more opportunities to engage with VCs both when when making seed invetsments and for follow on financing.

Regards,

Ron Thompson

Posted by: Ron Thompson | April 30, 2009 10:59 AM

The Angel Capital Association tracks Angel investmnets.

In addition, there is an ACA / NVCA initiative to increase collaboration in the venture funding community on early stage investing, increase the sophistication when engaging with Founders in making a seed investment, help ensure the better quality ventures are funded, expand the options to prudently manage the high risks inherent in this business, and improve the probability of venture success with a high ROI for stakeholders.

Because of these significant benefits, as an active Angel, I would appreciate more opportunities to engage with VCs both when when making seed invetsments and for follow on financing.

Posted by: Ron Thompson | April 30, 2009 11:01 AM

Great numbers indeed. It puts things in perspectives, thanks.

For those interested, there are some other sources of web specific numbers' digging (current situation and also other timeframes) here: http://tinyurl.com/ca46w7

Posted by: Wallen's | April 30, 2009 2:01 PM

btw, after the link, just press play and on the arrows

Posted by: Wallen's | April 30, 2009 2:03 PM

Bernard,

Great post and point about the numbers and visibility into this data. We've begun an effort to democratize startup and investor information, and at present, we have information on almost 57 angel groups and some or all of their portfolios.

We launched about two months ago so the information, while not always perfect or complete (yet), is a step in the right direction and in line with your idea of getting greater transparency into this information. To your point, nobody is doing this really well right now. Moreover, some folks who do capture this information, in whole or in parts, often make it available at exorbitant subscription rates ensuring it's available to a limited few.

Would love to connect and get your feedback on what we're doing.

Warm regards,
Anand
http://www.chubbybrain.com
asanwal(at)chubbybrain(dot)com

Posted by: Anand | April 30, 2009 4:32 PM

Please, stop using that picture. It make me lose my interest to read. It is so ugly.

Posted by: max | May 1, 2009 2:17 AM

Hey Bernard - great article. Quick disclosure, I'm a Venture Partner @ True Ventures.

True has actually done 5 Series A deals since October 2008 and we're on pace to do another few this Quarter.

Thanks for putting a spotlight on the early stage venture ecosystem.

Posted by: Tony Conrad | May 1, 2009 8:27 AM

Tony, that is great! It was the TrueVentures investment in Syncplicity just after the meltdown that got our attention and spawned the idea of our A Team research. Doing 5 deals in that time is wonderful. My limited research resources (any college interns listening please contact me!) means I cannot do all the research I want. But one thing I would love to do is a league table by number of A Series web tech deals closed. I know that is not the league table that LPs want, but it is the one that entrepreneurs need to see ie who is really active. Sounds like TrueVentures would at the top or near to the top in that league.

Posted by: Bernard Lunn | May 1, 2009 8:46 AM

Max, you not like my Mr T picture! You are behind the fashion times, cheezy '70s style is back. Or maybe it was back and left again, can never keep up. Any ideas for a better pic?

Posted by: Bernard Lunn | May 1, 2009 8:49 AM

Hey Bernard. Interesting post. You are missing quite a few firms, but a lot of the pure seed deals are done in stealth mode. I can however mention that O'Reilly Alphatech closed at least two deals: Grouply and Bit.ly, and First Round Capital closed at least Outright and Foodzie.

My firm, SoftTech VC, has closed 11 investments since Oct. 08. Of those, 5 were announced: the four mentioned above plus Home Account. Thanks!

Posted by: Jeff | May 1, 2009 3:46 PM

Jeff, thanks. It is amazing (and both humbling and encouraging) how many I missed. It seems that even the authoritative sources are not that authoritative and that is a subject I plan to explore some more. We will certainly note these in our database. I am encouraged by how useful, in a very chaotic way, blogging is as a research tool. Having done enough research not to be embarrassed (hopefully), posting the results gets lots of blanks filled in from comments. Call it lazy, iterative research!
But I do want to find a better way to get this data to some reasonable level of accuracy. Do you know who funds report this data to and how they report? How do you do it (for the 5 you announced)? Via a newswire service? To NVCA? To some other source? Twitter? Your Blog?

Posted by: Bernard Lunn | May 1, 2009 4:51 PM

The companies typically get covered in the tech press/blogs (Techcrunch, GigaOM, CNet, you guys, etc.). From now on, feel free to ping me when you do a piece on the early stage side, always happy to help.

Posted by: Jeff | May 4, 2009 10:19 AM

very strong man,nice photo..
welcome to tell me the detail..
http://watchesnews.blogspot.com/

Posted by: tissot | May 7, 2009 9:44 PM

Great article, Bernard. Like the other VCs who have commented, I'd point out that we at Flybridge Capital Partners have invested recently in digital Arbor and Dataxu - or at least that's what we've announced recently! :-)

Keep up the good work.

- Jeff

Posted by: bussgang | May 8, 2009 9:57 AM