There is a new optimism rising in the venture capital community. More than whispers, but not yet a shout, it is cautious, but you can hear it. And entrepreneurs, you should be listening and responding.
Why this optimism?
There is repeated confirmation that venture capitalists are creating a new uptick in their investments, based not only on the need to put their capital in play for a timely ROI (see WSJ 12/18/2009) http://bit.ly/7j0Yeb but from a confluence of other factors. These include:
The world economy is stabilizing, and may continue on this more-stable path.
Let me point out, they preface a lot of what they say with, “If the economy continues to stabilize…” They do not mention their own opinions on economic trends (recovery in a V or a U or a W), but many believe we have dodged the bigger bullet that threatened in the first half of 2009. They do not mention that corporate America is again beginning to buy new PCs and laptops – another indicator of recovery in the tech sector http://bit.ly/7D7mDV But they are watching the leading and trailing indicators like the best of the economists.
You and I may have other opinions about this stability, but if the investors can be optimistic, we can ride the wave. Many markets move on emotion, as we know.
I must admit I am not so optimistic, as the investors have more than the usual number of interesting companies vying for their attention, given that so little capital has been invested these past couple of years. And although the market may be moving upwards, capital is not flowing easily, and credit is still tight for early stage businesses, and the economists are still arguing about how the recovery will unfold. These conditions do not make for a “boom” in capitalization.
The technology platforms are now stable enough to generate a new, strong wave of innovation in products and services, applications, and new uses for new technologies.
In face of the past couple of years of capital-drought, entrepreneurs have innovated on sweat equity and private capital (often from Uncle George or other friends and family, or from individual angels or groups).
Consider this: an entrepreneur is halfway through his or her product development and the Q4 crash of 2008 occurs. What to do? There are no jobs, and the R&D is waiting. These entrepreneurs finished their products and sought capital to launch. Not much satisfaction there, so they launched as best they could. They displayed capital conservation at its finest. They gathered customer feedback, refined the product, and generated some early revenue – because there were no other options.
So, what investor wouldn’t like to see such an entrepreneur, when capital begins to flow again? The risks are reduced, and the innovation may be superb.
The markets for M&As and IPOs may return even this year, late in 2010.
If not this year, at least in time for the investors to exit some of their healthier portfolio companies next year. There is a pent-up demand for these exits, and for the cycle of optimism and renewed investment that will result – from the institutional investors who fund the VC’s Funds, and from the venture capitalists themselves to the entrepreneurs.
What do the venture capitalists like?
Based on these conditions, there are traits in products and companies that please these investors:
Disruption:
technologies that disrupt an existing marketplace and replace the existing 800 pound (old) gorilla. Make a case for your product’s innovation based on Christensen and Raynor’s work http://bit.ly/7GYRIW
Global reach:
products and services that have global application, can accept strategic co-investment from international capital, and which can create global market penetration and worldwide market share. Asia and India seem to have plenty of investment capital just now for co-investment with U.S. venture investors.
Ease of Use and Integration
products and services that are very simple to use for the consumer, and which extend that ease of use for integration into existing technology or strategic partners’ products. I heard someone refer to this as “no button technology.” That must mean simpler than the 4-button technology of the past (start, stop, forward, rewind).
products and services that are as simple to use as we find in our homes or on our PDAs, which can be applied to and sold into the enterprise market. Seems there is discontent among the workers in corporate America that their homes are easily integrated with neat technology, but the workplace still has restrictions on software use, memory needs and sharing on its old technology.
Capital Efficiency
This is the phrase that says an entrepreneur understands how to manage and conserve capital and still reach the pivotal benchmarks to build a successful company. This notion of thrift will stay with us all, well past the recovery.
One venture capitalist told me over lunch last week that he had two new criteria never before on his list for companies he would consider for investment: “depression resistant” and “sustainable until the recovery.”
What should entrepreneurs do next?
Assess yourself, your product or service, your company and your capital needs. How closely do these match what venture capitalists like for the current market conditions?
Then assess your company against these standard criteria: a unique product or service in an empty market space (disruption); excellent management team experienced in this market space; high scalability and potential for deep global market penetration, and some defensibility for your product. More on this here: http://bit.ly/6WZUiS .
Then, assess yourself against the “Strategies for Finding Venture Capital in 2010” (see WSJ 12/18/2009 http://bit.ly/7j0Yeb ).
Finally, prepare a succinct pitch (that means 10 slides or 3 pages of text), research to find the investors that care about your market sector and funding stage, leverage your network for introductions, and pitch a clear case for your company’s excellent potential for the investor’s ROI.
Best of luck… there may not be a tsunami of investment this year, but things seem to be looking up.
