The Current Environment

The holiday season has arrived none too soon for investors looking to get out of town before they experience any more market volatility. With many saying they’re closed for business until next year – some until Q2 – these are hard times for entrepreneurs who need to raise money.

Having only ever raised money during a recession, I feel your pain. In the new reality, a flat to slightly up round should be considered a victory and a down round not unusual. The days of the 2X or 3X step-up won’t be with us again for some time.

I recently urged a CEO – a company that had doubled its revenue in the last year – to accept a venture investment at a pre-money valuation only slightly higher than the previous round.

He looked me straight in the eye and in a weary voice said, “Do you really think this is our only alternative? Is this the best we can do?” I share his frustration. We’ve all had the experience of working hard – on all cylinders – only to have our efforts go unnoticed and unrewarded.

“For every one of you, there are 10 companies out there that aren’t going to get funded,” I told him. “They’ll need to find some other way to survive. What’s more likely is that they’ll just go away.” He nodded. Could they get by without raising money? Yes. But capital is critical fuel for growth. With money in the bank, a company can continue to build for growth when many of its competitors are struggling.

Investors aren’t known for their optimism. Just that morning a colleague had told me: “We just don’t have any visibility into 2009. It’s going to be a write-off year.”

Ironically, some “high concept” deals, companies with a big vision to change an industry, are raising money faster and more easily than those with revenue. That’s because VCs want to back the game-changing leader with a vision for the future. They want the winner-take-all bet that will deliver a fund impacting return due to its strategic and therefore inherently valuable nature.

The environment is most frustrating for those with revenue. If 2X or 3X multiples are depressing for a public market CEO with $100M in revenue, they are that much more depressing for those still trying to grow out of the law of small numbers. Consider the plight of those with good growth and $2M, $5M, or $10M in revenue being valued on those same multiples.

The good news is that investors seem to be a lot less shell shocked than they were even just a few weeks ago. A month ago they were still reeling from the suddenness of the market change.

Today, some smell opportunity. According to an entrepreneur friend of mine who just raised money from another top firm, a small handful of VCs “are laughing. While everyone else is running scared, they’re doing deals.”

The current environment might most aptly be compared to an emotional journey through the five stages of grief – denial, anger, bargaining, depression, and acceptance. As for me, always the pragmatist, I have reached acceptance. I find myself busier than ever helping our portfolio CEO’s with 2009 planning, working with those who are fundraising, reconnecting with those I haven’t seen in a while.

And, of course, I’m still looking for that next great investment.