Q1 (January through March this year) was bad for VC's raising money for new venture funds, coming as it did right after the implosion of the financial markets and the screeching halt to IPOs. New numbers from Thomsons and the National Venture Capital Associaton show that Q2 (the three months through June) was even worse. Check it out:
Note the average size of fund raised. In Q2 this was barely $70m per fund. That's pretty small compared to an average of almost $150m in Q4 2007. Is that a problem? It can be - smaller funds typically invest in early stages (good for startups) but aren't able to participate in larger rounds of funding for later stage growth. Where will that money come from?
Let's also be be clear what this money represents. Money they raise for their funds in Q2 is not the money VC's are putting to work today - that money comes primarily from funds raised in prior quarters and years. This is the money they raise today that they will have available for future investments over the next few years. Not a good omen as startups look to raise money for their future operations.
VC's will normally invest money in new portfolio opportunities for the first few years of a fund's life. They typically keep some portion of the fund available for follow-on investments with the companies they have already financed from that same fund - in part to maintain their ownership but also to insure their portfolio companies make it to an exit. Given that the latter is taking longer these days, they need to keep more of that powder dry than before. What this means is that once the monies raised from, say, 2006 through 2008 have been put to work or earmarked to support existing investments, there will be a drought for new startups. Of course, startups are feeling a drought now as, with the lack of exits (see my last post), investors don't even want to put that prior money to work.
Is it all doom and gloom? Not exactly. While August Capital and other premier names in the business continue to close new funds, and top notch individuals like Marc Andreessen and Ben Horowitz with their new $300m fund can still do whatever they want, this will weed out some of the weaker VC firms that, frankly, probably shouldn't have been in the business anyway.
And to get your startup funded you have to focus on the things that were always important but tend to be forgotten in times of plenty - great ideas, solid execution, hard work, superior management teams, monetization, creative thrift with spending ... qualities which are still in abundance in the Valley!
Let's also be be clear what this money represents. Money they raise for their funds in Q2 is not the money VC's are putting to work today - that money comes primarily from funds raised in prior quarters and years. This is the money they raise today that they will have available for future investments over the next few years. Not a good omen as startups look to raise money for their future operations.
VC's will normally invest money in new portfolio opportunities for the first few years of a fund's life. They typically keep some portion of the fund available for follow-on investments with the companies they have already financed from that same fund - in part to maintain their ownership but also to insure their portfolio companies make it to an exit. Given that the latter is taking longer these days, they need to keep more of that powder dry than before. What this means is that once the monies raised from, say, 2006 through 2008 have been put to work or earmarked to support existing investments, there will be a drought for new startups. Of course, startups are feeling a drought now as, with the lack of exits (see my last post), investors don't even want to put that prior money to work.
Is it all doom and gloom? Not exactly. While August Capital and other premier names in the business continue to close new funds, and top notch individuals like Marc Andreessen and Ben Horowitz with their new $300m fund can still do whatever they want, this will weed out some of the weaker VC firms that, frankly, probably shouldn't have been in the business anyway.
And to get your startup funded you have to focus on the things that were always important but tend to be forgotten in times of plenty - great ideas, solid execution, hard work, superior management teams, monetization, creative thrift with spending ... qualities which are still in abundance in the Valley!
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