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.
I always enjoy your balanced perspective and style of writing David and often look to your blog as the thermometer of the times.
Two things occur to me as an entrepreneur on the verge of greatness, who is fortunately escaping much of the negativity surrounding investors. Firstly, I’m amazed how little mention is made of the fact that whilst the US has been at the forefront of the financial meltdown it still provides the dominant commercial ‘ocean’ in terms of online platforms and could look at itself as the nearest and best positioned economic environment to the light at the end of the tunnel, and upon which even more of the worlds selection of ships will still have to sail.
Assuming Google, Microsoft, Facebook, You Tube, MySpace et al aren’t suddenly compromised by some non US genius collection of all of the above in one place who can suddenly grab the world’s attention, it would appear that the US will still lead the next 20 years or more in technology and media and so a short term financial crisis in confidence should be a distraction and not an excuse to lock up shop.
The other reason so many big companies have grown from recessions is in my opinion about character. True entrepreneurs don’t look at hardship as an obstacle, rather they see it as opportunity. I’ve had months of negotating with VC’s and so many of them have tried to patronise me and imply that they would rather see a well known CEO at the helm, whom they’ve worked with before. Time and time again, I have found myself reminding them that for every huge success, there is one name attached to that brand…Microsoft, Google, Apple, Facebook, Salesforce, etc. etc. Most of the Gates, Jobs etc. or employees thereof whom I’ve been encouraged to court, never needed the VC to tell them how to run their business either. My conclusion is that for all the VC’s that look at this time as the end of the world as they know it, will never pull off a Peter Theil or Jim Clarke, because they won’t and can’t know what it is to get behind a true entrepreneur and give him the platform to do his stuff his way, rather than shape him up to do it their way. If I were a US VC, I’d be rubbing my hands, because when the chips are down the heroes shine brightest and when I look past the misery of tax hikes and wingers, I can see a really bright light which has copyright USA stamped on it! You guys are gambling on horses and the one who goes for the outsider when the odds are worst is gonna get the cream!
As to your next big investment, it is probably too late but…
Comment by famebook (Jan) — December 5, 2008 @ 9:48 am