The National Venture Capital Association recently released a member survey that predicted:
—In 2010 there will be fewer VC firms
—Surviving VCs will spend most of their remaining funds on existing investments, and
—Leftover funding will focus investments mostly on later-stage deals
It’s hard to avoid the conclusion that things are looking very grim for early stage companies. But in the spirit of the Ghost of Christmas Future, let me offer a (somewhat) contrarian point of view. I have absolutely no data to back up my predictions, and I agree it will be a bad year (or two or three) for VCs. But all is not lost.
First, invention continues apace. We will look back on this period and realize that many talented private sector engineers and scientists affected by corporate downsizing are taking their own ideas to market. In addition, federal stimulus funding has had a positive impact on university research.
Second, while traditional VCs are suffering, we are seeing an increase in activity from private equity firms, many of which view the current environment as particularly conducive to good deals.
Third, while VCs are in the midst of a multi-year retrenchment, they’ll increase the number of “micro-investments” in very early stage investments. While this may seem contradictory, recall that VCs have in the past avoided small investments due to the expense of due diligence per dollar invested. VCs today, however, have little dry powder yet still have staff. I believe we are already seeing VCs dabbling in small investments, “incubating” small companies, particularly in clean-tech, medical devices and robotics.
Finally, while angels have also been affected by the downturn and are being forced to support their existing investments, they do not face the same structural pressures as VCs. Their money does not come from large institutions with fixed expectations for their investment returns, or that are intent on reducing their investment in the venture asset class because they feel the VC model is broken. Rather, new angels appear on the scene at a steady pace, unconstrained by the need to prop up existing portfolios.
So be of good cheer. It’s not the best of times. It’s not the worst of times. It’s a time to revise strategies and begin the New Year with a fresh set of expectations.
[Editor’s Note: As the decade comes to an end, we’ve asked Xconomists and other technology leaders around the country to identify the top innovations they’ve seen in their fields the past 10 years, or comment on trends that will impact the next decade.]
