The turnout was heavier than expected as the San Diego Venture Group convened its monthly breakfast meeting yesterday for a program on “Company Financing Alternatives in a Challenging Environment.”
Coordinators had arranged tables for 300 in the outdoor pavilion at the Hyatt Regency La Jolla. But interest was so high in the topic that several more tables were set up to accommodate the overflow.
The ensuing discussion, though, was sufficiently gloomy to prompt CommNexus CEO Rory Moore to stand and remind the audience that “some of the greatest companies were started in the hardest times.”
While capital is available, the four panelists emphasized that financing has changed dramatically, and providers are now very cautious.
“It’s all about preserving capital and staying focused on the ships you’ve already launched, rather than looking for new ones to launch,” said panel moderator Carl Eibl, a managing director at San Diego’s Enterprise Partners Venture Capital.
As cash gets scarce, venture companies face a dilemma, Eibl said. The overall effects of plunging markets and frozen credit mean that venture firms will be facing a “Sophie’s Choice” in deciding which of their portfolio companies get to live.
At the same time, Eibl noted that the third quarter that ended Sept. 30 was a “record quarter” for many of Enterprise’s portfolio companies. So it’s hard to justify peremptory cutbacks for a company that is “growing well” and generating revenue, Eibl said.
As a result, Enterprise Partners has added a number of market indicators to the list of things they want their CEOs to watch, Eibl said. Changing these “dashboard metrics” helps focus everyone on the economic conditions the company faces several months out, and Eibl says “We check those metrics with our CEOs every month.”
Private equity investor Jim Caccavo of Steelpoint Capital said he participated in many discussions about “massive losses” among institutional investors during a recent trip to New York.
The effects of those losses, however, have not yet rippled through the venture capital firms and other capital providers that raise their funding from institutional investors, such as pension funds, insurance funds and university endowments.
“We heard a ton of discussions about limited partners failing to make capital calls, Caccavo said. “That’s something I think we’re going to see more of in the next six months as both high net worth individuals and institutional investors default on their capital calls.”
Market losses in conventional stocks means institutional investors also will be left with disproportionate investments in venture capital funds and other high-risk alternative investments, Eibl said. That means they’re more likely to pull back on additional venture investments until portfolio managers have rebalanced their investment allocations.
The consequences will be far-reaching in the venture community.
Steelpoint Capital, which has 28 companies in its portfolio, recently terminated four CEOs “because they just were not reacting to the market,” Caccavo said. “So if you’re a CEO out there, you really need to be proactive, you need to be going to your board with what you plan to do.”
Caccavo later added: “You’ve got to start with absolute realism about what’s going to happen in the next quarter, the next six months, the next year, the next three years.” He urged venture CEOs to be prepared to scale back drastically.
Eibl agreed, saying, “You cannot tolerate people who are not producing. You have got to rank your employees and do what’s necessary.” At the same time, Eibl observed that layoffs taking place throughout the economy provide an opportunity to recruit extraordinarily talented people.
While it is obvious that liquidity is paramount and “cash is king,” Kathy Conte, a managing director of life sciences at Hercules Technology Growth Capital, said she has never seen a comparable situation in the 28 years of her career in finance.
“Everybody is looking through their portfolio companies, and everybody is thinking ‘triage,’ ” Conte said. She later observed, “I don’t want to be all gloom and doom, but there is a big liquidity crisis in the world.”
As a specialist in venture lending for life sciences companies, Conte said, “We have money. We are looking for good opportunities. But let’s not gild the lily. Money is very expensive right now.”
As for angel funding, Caccavo said it has become more important for entrepreneur and CEOs to learn if the person you’re talking to is liquid now. “Otherwise, you’re just wasting your time.”
