What VC's Are Most Worried About ...

Not only did VC investment in startups fall again in Q2 this year (the 3 months ending June 30) compared to Q2 2008 (by 57% from $6.5 Bn to $2.8 Bn) but in a survey by Polachi Inc just published on Silicon Alley Insider the reason why is not what you might think.

It's not because they can't find good investment opportunities - fundable ideas, if you will. From my own experience and that of others I talk to in the investment community the "deal flow" of good opportunities is stronger now than ever.

It's not because they can't invest in decent management teams. If anything the recession has thrown a lot of talent into the street that is a goldmine for startups looking to recruit  the skills and build teams.

It's not because of a bunch of other things either. Its because the VC's don't see an "exit". A successful exit - for a VC - is simply an IPO (take the company public and sell your shares for a 10x or greater return on your investment 6 months to a year after the liquidity event) or a sale of the company to a corporate or other acquirer (Google buying YouTube, EBay buying PayPal etc). As we know - with few exceptions such as the recent OpenTable IPO - the IPO market has been dead. And the corporate M&A market, despite the attractiveness of some of the acquisition opportunities (lower valuations, lack of other exits etc), hasn't been much better.

So the biggest issue stopping a VC investing today is "how will I actually realize the return on my investment in this great idea?" If we don't solve that problem then we are in for a rough time getting Valley startups funded - which will be to the detriment of the whole ecosystem and technology in general.

(And no, I don't know why it adds to more than 100% - I guess some people are "most" worried about more than one thing ...!)

Comments

[Bob Scarborough]

I've heard this concern expressed concerning timeframes - that it takes 8 or more years to have an investment exit - but that VC funds last 10 years. The old model was to invest the first three years - and to nurture and harvest over the last 7. If your exit strategies take 8 or more years you are investing for one - and nurturing for the rest of the time hoping for a late harvest.

The Valley VC model differs from the models used in much of the rest of the world related to timeframe. Maybe the answer are:
1) More patience - longer term horizons - smaller investments, or?
2) Investing in companies at a more mature stage, or?
3) Or planning your exit strategy at the time you make your investment?