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 MoneyTree⢠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:
- Atlas Ventures
- Bessemer Ventures
- Draper Fisher Jurvetson
- Emergence Capital
- Maple Investments
- Menlo Ventures
- Opus Capital
- Trinity Ventures
- True Ventures
- Union Square Ventures
- Valhalla Partners
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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