Accept Venture Capital Realities

Startups and entrepreneurs need to be realists. You need to accept the fact that today’s down economy has changed the way in which venture capitalists see the world, so you should adjust your strategy and expectations in dealing with them.

First of all, the venture process isn’t dead yet. Venture capitalists invested $4.8 billion in 637 deals in the third quarter of 2009, according to the MoneyTree™ Report from the National Venture Capital Association (NVCA). Quarterly investment activity increased 17 percent in terms of dollars compared to the second quarter of 2009. "The third quarter illustrates a gradual and deliberate industry shift towards a longer term venture capital investment strategy," said Mark Heesen, president of the NVCA.

There is no doubt that many VCs are still holding onto their cash while they wait for conditions to improve — a lemming-like mindset of cash conservation that won’t help pull us out of the downturn. The other reason is that the limited partners who fund venture capital firms are still facing a liquidity problem.

Many of the large endowments that invest in the venture industry have seen their net worth plummet. As the stock market sunk in value last year, it meant a greater proportion of their portfolio was invested in riskier and less liquid investments. The market is coming back, but it is still well under water.

So what can you do to optimize your chances of getting a chunk of the money? Here are some recommendations I have heard from the experts:

• Move your company to Silicon Valley or Boston. VCs have pulled closer to home and hunkered down. Like angels, they like to touch and feel their investments. About half of the VC dollars and deals come from these two corridors, so it helps to be there.
  


• Move your company to China, India, or Israel. Amazingly, it you can’t be where VCs live, the next best thing is to be way out in the new frontiers of investment. Overall, venture capital investment fell in the United States last year but rose elsewhere. This is called overseas speculation in big growth opportunities.
  


• Get in a recession-proof sector. Many sectors where VCs have traditionally made the biggest home runs have faded or matured. These include chips, computers, software, telecom, and the Internet. Last quarter winners were clean tech, biotech, and medical.
  


• Personal networking is key. Unless you know a VC personally, the chance of getting them on the phone and pitching them, before they have had a chance to look over some kind of summary, is zero. An entrepreneur should use advisors to find someone "on the inside" who can make personal introductions to investors.
  


• Hone your executive summary. Once introduced, your best entre is hitting the VC with a well-honed executive summary. Here are the “big four” that must be in the summary - what you do and what space you are in, how you make money, your competitive advantage and your funding plans.

Make no mistake, the first priority for VCs this year will be to provide more monetary support towards existing investments and companies, As a result, young, innovative companies are being hit hard. Many believe that investing in new technologies and paradigm shift products is too risky a move in today’s down economy.

The upside of the down economy is that it opens prospects to obtain great deals. Luckily, some VCs feel that the best time to invest is during a struggling market, when both valuations and competition are at an all time low.

I believe that startups and venture capital firms that struggle but survive in 2009 will emerge stronger in 2010, making that a year of recovery and renewal in the investment world. Be there.

Marty Zwilling