Babbling VC

Venture Industry Doomed....again.......and.........again!

This is becoming an almost annual post I guess. Venturebeat and a couple other blogs are commenting on NVCA numbers out of the US where it's clear venture investing plummeted in 2009. Is anyone surprised? This was clearly discussed as inevitable at the beginning of the year. Yes, the industry is contracting (as well as evolving). Am I surprised? No, there simply was too much money chasing too few deals. In Europe, the decline is probably steeper but I do not have exact numbers to compare. 

Yet, we're all still here. We're doing deals and our dealflow has significantly become better in the past 6 months. Fundraising will remain difficult for VC's throughout this year and into next. Many players and even funds will disappear. This has happened many times in the past. After each dip new players evolve and the best continue to thrive. As I've written before, we're going to see more super-angel funds and angel investing in general. It takes so little to launch start-ups nowadays (just look how quickly 5 clones of Groupon appeared in Germany). You don't need $500 million funds for those types of investments. Here I point to initiatives like Seedcamp.  

Mark and I had a short back and forth on the fact that we prefer being where few VC's are. In Germany, you definitely have very few early stage investors. That makes for good investing if you manage to survive and source the best deals. Mark's in L.A. where you also don't often hear of too many players. Generally, this trend of less VC's is good. It'll lead to fewer deals but usually quality goes up. 

It's going to hurt for the VC's. The hurt is going to get worse too before it gets better. I'm hearing lots of news about partners bailing out (or being politely nudged out) already. Fundraising efforts are being stopped mid-cycle. Lots of funds are basically running on fumes. Yet, like them or not, look what the Samwers are able to do in Europe. They're not playing "by the rules" and soon, lots of VC's will have to figure this out as well or risk quickly becoming irrelevant. (Note, when I refer to "playing by the rules", I mean the rules of venture capital as it's existed for the past 30 years. Doing illegal crap doesn't count!)

Don't Shop Your Business Plan Around

To those of you not familiar with the term "shopping around", it basically means bombarding your targets with your product, in this case a business plan. It's common knowledge that when you go out to raise money you don't send your business plan to any and every VC. You pick wisely a small group whose portfolio you might fit into and try to get intros to them. It's highly unwise even within this small group to just send your business plan blind. I've written about this many times before. Even worse though is shopping your business plan around within a firm and our network. I have this happen once or twice a year where within a day or two, I will have one business plan sent to me, each of my partners, our CFO and probably our office manager. Further, a couple of my portfolio company CEO's may be asked to pass it on to me and if the firm is using someone to help them raise money, they too will come calling. A couple lawyers whom we work with may also call to pass on this business plan to us. I can understand doing your best to get your business plan in my hands but this is not the way to do it. Have one person intro you to me. Either have them ask whether I want to take a look or have them recommend to me that I speak with you. But don't have me bombarded with your plan from all sides. This very quickly causes concern on my part about how you will approach your customers, partners and so forth. 

Time and Momentum in Venture Capital

This is more of a reminder than anything else. I have posted similar items in the past but it bears repeating every now and again. I see entrepreneurs so often drop the ball when it comes to time and momentum. What I mean is that so often momentum is lost because people simply take too much time. A sense of urgency is always necessary. Getting bogged down in analysis ("analysis paralysis") is oftentimes your worst enemy. Always remember that momentum is on your side when it comes to financing rounds and general day-to-day with VC's. 

As a VC, I tend to like positive momentum. If a deal "feels good", things "fall into place" and deadlines are kept, psychologically I'm more involved. If you tie me up in endless negotiation, try to optimize every last detail of a deal or decision and basically take the wind out of the deal's sails, my mind tends to drift. Further, if you keep stalling in the hopes of a better deal coming along, I tend to catch on to this. Don't forget, we do this business every day and most of us have seen it all. There's always another deal to move on to.

If you sense that a firm generally likes your deal, has committed time and effort into getting a deal done and you generally are comfortable with it, keep the momentum going. Get things done and close the deal. Nothing is ever perfect nor can you continually optimize everything that comes along. Yes, you may make mistakes and I stress that you avoid the big ones if possible. Sometimes you do have to slow down to check the details. Yet little mistakes here and there sometimes just don't matter in the grand scheme of things. Certain terms don't much matter if you've spent every last dime. 10% more of an insolvent company just ain't worth much! Keep up momentum. 

Update: Mark did a great post on this with lots more detail. Check it out!