One of the questions I’m asked most frequently by entrepreneurs and small business owners, is, “What’s happening in the capital markets? Do I have a chance of getting funded in the next year/two years/five years?” The answer I give, of course, is, “It depends.”
“It depends” on a number of factors, so let’s answer the question by taking a look at current capital market conditions.
The National Venture Capital Association (NVCA) recently released its analysis of venture capital funding for the first quarter of 2009. If you’re surprised the number of investments made by VCs has decreased sharply compared to recent years, you obviously haven’t been paying attention.
You can check out the full report but here is a key finding: 549 venture deals were made for a total of approximately $3 billion in funding. That may sound like a lot of investment, but it’s the lowest number of first-quarter deals made since 1995. (And if you tend to feel survey results aren’t reliable, their findings are right in line with my experiences.)
For a sense of what’s ahead, the NVCA and Deloitte Touche also surveyed 700 venture capitalists for the NVCA 2009 Global Venture Capital Survey. The results: 51% of respondents plan to decrease the number of companies they invest in, while only 13% plan to increase investment activity. (Which, assumedly, means the other approximately 35% plan to invest at about the same rate as they did in 2008.) Again, those results are in line with what I’m seeing and hearing from the VC and angel community.
So: Bad news for entrepreneurs? Maybe – but not necessarily. Again… it depends.
Here’s why: Over 60% of respondents expect investments in green technology to increase over the next three years: Consumer demands for alternative energy and government-backed programs should increase venture capital activity in that sector. Other areas of growth include medical devices, new media, consumer business, and biopharma.
On the other hand, don’t expect growth in sectors like telecommunications, semiconductors, or software.
But since opinions are, well, opinions and not facts, keep in mind not everyone thinks “clean-tech” investing will continue to grow at a rapid pace. Check out this presentation by Rob Day of @Ventures. He feels there is too much concentration on energy generation and the rate of clean-tech investment will slow in 2009. (It’s also an interesting glimpse at how at least one VC views the business of capital investing.) While I may disagree with some of his reasoning, I think his overall analysis is directionally-accurate if not right on.
The recession has also caused VCs to shift their strategies to later-stage investing. Only 6% intend to do more early-stage investing. Evidently the goal of the majority is to support growing companies or existing portfolio companies until exit markets improve, a strategy some of my colleagues are embracing with a vengeance.
Keep in mind a shrinking capital market may not be a bad thing, at least for VC firms. Union Square’s Fred Wilson feels the VC industry has too much capital. Over the last ten years or so investment has clipped along at a rate of $25 to $30 billion a year; Wilson argues that $15 to $17 million per year is a more appropriate rate for U.S. venture capitalists to be able to generate attractive returns.
But believe it or not, a shrinking capital market does have an upside for entrepreneurs. VCs – and angels – may reduce their rate of investment, but they still are eager to fund companies with ground-breaking technologies, new solutions for old problems, or who create products and services that meet the needs of today’s consumer. The key is to prove you are an entrepreneur who can execute your ideas and with the right funding and guidance build a sustainable company. For every Twitter-ish company that can get funding without having paying customers or even a viable business model (at least at this point in Twitter’s life), there are dozens of companies who will receive funding because they have the skills and expertise to bring their product or service to a market eager to embrace them – and pay for the privilege.
So take a step back. Here’s what I did the other day: I pulled out the book Built to Last. First published in 1997 (I know, that seems like a long time ago), it details the rise and sustained excellence – at least up until that time – of eighteen companies. Some were built on the basis of a single idea, but others grew and prospered because the founders were willing to adapt to the needs of their customers and the marketplace… even if that meant transforming into very different companies than the founders originally envisioned. While a few of the stories in the book might seem a little dated, the lessons are still valuable, especially for entrepreneurs. The key is to remember that sizzle is not steak… and more and more investors are ignoring the sizzle and thoroughly evaluating the steak.
So here’s the bottom line: Whether the rate of capital investment increases or decreases, there is one thing you can count on. Dedicated, passionate people… with great ideas… and solid, well thought-out plans… who can execute those plans brilliantly… will receive funding from VCs and angels. Take a little time to keep track of investment trends, but spend most of your time focusing on what you can control: Turning your ideas into a business reality. If you create a viable company, VCs and angels will find and fund you.