Tech VCs Hope For A Quick Recovery

On June 3, 2009, in VC2.0, credit crunched, venture capital, by Tim

The chart below shows the recent decline in valuations of late stage venture backed companies as reported by the Wall Street Journal.

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It’s a decline that hurts everybody, with cash starved companies taking whatever they can get, which is often a far cry from what was promised and according to the WSJ, existing investors are increasingly resorting to propping up valuations, something that is clearly only sustainable in the short term.

In the first quarter, 57% of all venture rounds in the U.S. were done by insiders only, according to VentureSource. The prevalence of such financings has raised concerns that venture firms are propping up valuations to avoid write downs that would affect fund performance. A new investor is more likely to question whether a company is over-valued.

No doubt everyone is hoping that a recovery will take place ans valuations will soar once again, but if we are in for a longer slump it;s a dangerous game to play and we will see more VCs becoming over exposed and undercapitalised.

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Cleantech Investors Desperately Seeking The Exit

On April 30, 2009, in Finance, Renewable Energy, VC2.0, venture capital, by Tim

In my predictions over the last year I mentioned that Clean Tech would have a rocky time in 2009 for four reasons

  1. Renewable energy interest tends to lag oil prices by 6-12 months and with oil almost back to 2006 levels a lot of transient interest will evaporate
  2. Lot’s of clean tech companies based their business models on sustained high oil and commodity prices – so a recalculation will reveal that they don’t stand a cats chance in hell of being profitable
  3. The stampede by Venture Capital into every clean tech deal going for the last two years has inflated valuations to levels that will never return any cash to investors – and that was before anyone took into account  recessions & pestilence
  4. As a result, VCs would find themselves locked into very expensive deals and have trouble shaking down their limited partners for the funds necessary to keep in the hunt

Don’t say you weren’t warned. It must be getting serious when even VCs are getting contrite – according to the New York Times:

David J. Prend, managing general partner at RockPort Capital in Boston and Menlo Park, Calif., said that the promise of big returns prompted too much “me-too investing,” when venture capitalists put money into start-ups that do the same work as other companies.

“There was probably some stuff that shouldn’t have been funded,” he said. “It’s kind of good for some of that to get washed out.” For clean tech to be a viable industry, investment should not return to recent highs, he said.

Mr. Vassallo blamed the credit crunch for the decline in clean-tech investing. More than half of clean-tech investments have been in alternative energy like solar and biofuels, which typically require building big factories. These projects depend on capital like project finance loans as well as tax equity investments, whereby corporations back green energy projects and reap the tax credits. These have been “frozen or completely disintegrated,” he said.

This is weird & spooky. Didn’t the same folks say the same thing about dot com investing, about nanotech and now clean tech? Are these the people we see rooted to spot, continually banging their heads against a wall crying “I know there was an exit here somewhere!”

Mark G. Heesen, president of the National Venture Capital Association, prefers to call the clean-tech investment cycle “an education curve.”
Still, he said, “if the industry has gotten one criticism year after year, it’s that we have a lemming mentality, and solar probably represents that in the clean-tech space.”

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Angels vs VCs

On April 19, 2009, in Finance, VC2.0, venture capital, by Tim

Stephen Fleming at Academic VC has an interesting article about the diverging interests of angel investors & VCs. The basic premise is that the high returns required by venture funds drive them to take decisions which are neither in the interest of the founders nor the early stage (Angel) investors.

I’ve seen this happen in a number of companies, and it’s not pretty. As a result, the founders often end up with next to nothing, even if there is an exit.

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The Best Minds in the UK At Loggerheads Over Technology

On April 16, 2009, in Economy 2.0, VC2.0, credit crunched, venture capital, by Tim

British scientists are hopping mad about comments from Bank of England Governor, Mervyn King, who recently argued against increased science funding, presumably on the grounds that all the money had already been spent on health and safety agencies, totally ineffective government agencies and bailing out Scottish Banks.  I would expect the Governor of the Bank of England to understand a little bit of basic economics and that economic growth has always come from technology (think of the Industrial Revolution which created the British Empire) rather than bulldozing money into a pit and setting fire to it. I think I’m hopping mad too.

With lunatics like this running the asylum its hardly surprising the UK economy is in its present state.

Sir Roy Anderson, rector of Imperial College is being firmly diplomatic rather than hopping mad, and calling for a £1bn venture capital fund to support small high technology companies, an ideas as insane as Mervyn Kings. For all the whinging about the UK venture capital industry, it’s not too bad. It’s not Silicon Valley but it’s much better than most of the rest of the world. However, like their UK counterparts it doesn’t work too well, and shovelling yet more public money into another lame duck industry won’t do any good either.

It’s hard to believe that the finest minds in the country can’t come up with a better idea for an economic stimulus package than chucking loads of public money at things that don’t work. Putting their underpants on their heads and shouting at the traffic would   have as much effect and be a lot better value for taxpayers.

Despite its recent woes, there is enough liquidity in the VC industry to continue doing what it does, but what it doesn’t do is invest in early stage technology companies. In fact not many people do and that’s where the money really needs to go, to support early stage companies and get them to the stage where they can attract further capital from customers, banks or even VCs.

As I wrote in February, Let a Million Flowers Bloom!

Given that the returns on most asset classes are now negative, entrepreneurs are one of the few places where some wisely invested cash will give a decent return. Imagine what would have happened if governments had refused to bail out the banks and put the cash into technology, entrepreneurs and small businesses instead? We’d still be a few hundred billion in the hole, but at least there would be some chance of getting some of it back and stimulating the overdue reinvention of the economy.

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A Fool & His Money Are Soon Parted

On March 17, 2009, in Economy 2.0, Europe, venture capital, by Tim

It’s nice to see the UK Department of Innovation, Universities & Skills (DIUS) lobbying for a billion pounds to be spent on scientific research, but it’s worrying that, as with most of these ‘stimulus’ packages, little time has been spent figuring out what really needs to be done and the majority of the package is focussed on quick wins and headline grabbing – or as the BBC puts it “funding bodies have been asked for a “shopping list” of ideas that would strengthen British science and boost the economy quickly.”

Now boosting the economy quickly through spending an extra billion pounds on science simply isn’t going to happen – at least not in time for the next election in mid 2010, and as I mentioned a couple of years ago:

The timetables of science (which operates in a framework of decades or longer) are completely out of sync with the timetables of public policy (which operates in a framework of months and years)

Despite this, according to the BBC “many research leaders are determined to ensure highly trained scientists and engineers don’t get lost during the downturn.” Get lost? Where are they going to go, investment banks, hedge funds, venture capital or simply sublime? Who in their right mind would give up a nice secure government funded science post at the moment? Losing scientists to other industries is the least of the problems.

Showing how out of touch policy is with the real world, the BBC also reports that DIUS “is also considering proposals to create two funds to encourage venture capitalists to invest in small high-tech companies by matching their investment with public funding.” I hope that they give up this idea pretty quickly, or at least only open it to VCs who have shown a decent return over the last ten years. Compounding one problem with another is hardly a solution.

Yes, a billion pounds invested in UK science would make a difference, but its not the kind of quick fix that politicians are looking for, and unless it is a well thought out strategy, and one that connects to the overall economic stimulus plan then it will be more yet money swirling down the drain.

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Building a .-tech economy from the ashes of the current one

On February 22, 2009, in Europe, Finance, US & Canada, VC2.0, credit crunched, venture capital, by Tim

Thomas Friedman in this weekends New York Times echoes my recent thoughts on how to get us out of the credit crunch recession:

As we invest taxpayer money, let’s do it with an eye to starting a new generation of biotech, info-tech, nanotech and clean-tech companies, with real innovators, real 21st-century jobs and potentially real profits for taxpayers. Our motto should be, “Start-ups, not bailouts: nurture the next Google, don’t nurse the old G.M.’s.”

I think the same is true in Europe. We do have world class science on which to base innovation, and a whole host of dinosaurs that will become extinct whether we as taxpayers fund them or not, but my US colleagues do have the impression that most European entrepreneurs still try to work a 35 hour week and take 8 weeks vacation per year.

Isn’t quite that bad, but in terms of entrepreneurial culture the US ‘can do’ attitude goes a long way to getting technologies off the ground despite the problems I highlighted. Some of the more interesting deals I have been involved with recently are ones where the entrepreneurs made sure that I “got” it though sheer perseverance. Once we are past that stage, getting the deal done can be even more challenging, especially when dealing with companies, lawyers and investors in time zones ranging from Bangkok to San Francisco, but good entrepreneurs (and investors) shouldn’t let a little thing like sleep get in the way.

The current situation may be rather trickier than the dot com years, but economic turmoil often throws up a host of new opportunities for anyone still watching out for them. I’m seeing some fantastic deals, with some great technologies at sensible prices, and doing more of that and less of the bailing out of lame duck industries is where our future economy will lie, and my bank manager (Barclays) keeps exhorting me to tell everyone that they are still lending money and doing deals.

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Hand Over The Cash Or We’ll Smash The Place Up

On February 12, 2009, in Europe, credit crunched, venture capital, by Tim

The UK Venture Capital industry has become the latest to thrust its hand out for a £1 billion bail out claiming that it is “potentially a lost generation of companies.”

Why? Well, as we predicted,  the reason is that VCs cannot get exits and cannot raise fresh capital for their current portfolio companies, something that may have been buried in the small print of the term sheet. As a result many companies cannot raise the second or third rounds of financing that they were expecting and may go to the wall. The industry as a whole is now demanding that the UK government fork over a wad of cash so that they can continue to take their management fees continue funding innovation.

The implicit threat is that without that investment, a whole raft of companies developing clones of Facebook and Twitter may be lost forever. Instead of bemoaning this we should be shouting hooray!  How many billions of dollars have been ploughed into “me too” investments by people who can’t see beyond the narrow confines of Web 2.0? ? It’s hardly innovative now, is it?

As I discussed last month, the VC industry is becoming a bit of a lame luck. The world has changed, quite fundamentally, and ploughing on with a business model that clearly does not work, either for investors or entreprenueurs doesn’t seem a very sensible course.  Rather than handing out public money to fund unsustainable businesses, we should be waking up to the new economy and making sure that any resources are ploughed into taking advantage of the future, not applying sticking plasters to a half dead industry.

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Let A Million Flowers Bloom

On February 1, 2009, in Economy 2.0, Finance, Nanotech, VC2.0, credit crunched, venture capital, by Tim

mao-flowersGiven the global gloom emanating from all sources, it was at least nice to see that our little bit of the world, nanotechnologies, got a mention in Davos and Andrew Maynard who is also on the nanotechnologies council with me has the background details here.

However, I’m still a bit worried that most discussions about nanotechnology tend to focus on what might be possible, or enabled, which is always much more interesting to waffle on about than the nitty gritty business of how to actually do it. Let’s have a quick recap of the situation.

  • The Venture Capital industry is in disarray – returns are close to zero, limited partners are bailing out and Web 2.0 will always be more interesting than hard stuff like nanotech
  • Most University tech transfer offices think they are Stanford University or MIT circa 1998 and haven’t cottoned on to the fact that academic research is not some kind of sausage machine where brains go in at one end and money comes out at the other simply by pressing the right buttons
  • Many applications of nanotechnologies can take ten years to get to market and could require anything from ten million to a billion dollars to get them there

So, given the current climate, no matter how good your idea/technology/business plan is, the chances are you are going to get screwed by investors, banks and your own university before you can even contemplate running it as a business. Of course for that 1 in 100,00 there is always the chance that a Dow/BASF/Mitsubishi might step in, but you could also buy some lottery tickets and perhaps save the hassle. That’s not much of an incentive for anyone is it?

At the same time, we have the world crying out for solutions that only materials (and let’s face it, nanotech is all about the control of materials) can provide. It’s been that way since the invention of fire, and every technological leap forward has been associated with the material that made the economic boom possible, bronze, iron, coal/steel and silicon.

It was good to see my concerns being slightly addressed at Davos with the statement that “Most funding goes to developing materials, but developing manufacturing capability with a high degree of reproducibility is a huge challenge that needs proper funding” but the problem goes much deeper than that. Despite the the current recession there us no shortage of academic innovation, or entrepreneurial creativity, and despite what the doomsayers in the media will have us believe, we’re not all living in caves eating mud pies and consumers and businesses still have cash to spend or invest.

Given that the returns on most asset classes are now negative, entrepreneurs are one of the few places where some wisely invested cash will give a decent return. Imagine what would have happened if governments had refused to bail out the banks and put the cash into technology, entrepreneurs and small businesses instead? We’d still be a few hundred billion in the hole, but at least there would be some chance of getting some of it back and stimulating the overdue reinvention of the economy.

The next few years will be tough, but as a species we’ve had worse, and our innate creativity coupled with technology will see us through. I’m reminded of one of my favourite misquotations from the eminent philosopher and Yangtze river swimming champion Mao Zedong:

“Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting progress in the arts and the sciences and a flourishing socialist culture in our land.”

Perhaps we don’t need to worry about the socialism bit too much, but a trillion dollars should allow a few million flowers to bloom. Instead of pouring  cash into fixing yesterdays mistakes, we should be investing for tomorrow.

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Buying Technology For Beans

On January 22, 2009, in Nanotech, Publications, US & Canada, credit crunched, by Tim

An article in today’s Wall Street Journal illustrates the effect the credit crunch recession is having on Venture Capital portfolios. John Steuart, a Claremont Creek managing director is quoted as gleefully saying “The portfolio is competing against itself and it’s survival of the fittest. It’s brutal”

Here’s the problem for all of those game changing nanotech companies still struggling to find a market…

Many venture-capital firms, which put money into start-ups with the aim of profiting when those firms go public or are sold, are going  through a similar Darwinian exercise of sorting through their potential winners and losers. While the venture business enjoyed something of a revival in the past few years, the financial crisis has slowed the spigots of cash going into the sector. It also has crimped returns by damping the market for initial public offerings of stock and for mergers. Meanwhile, many venture-backed start-ups are getting hurt as demand for their products shrinks.

Given that the world is now realising that much of the financial world has been run by buffoons who didn’t have a clue what was going on or they were investing in, I think that there might be some decent value to be had here. The same people who invested in technologies without understanding a thing about them will now be selling them off, so the opening offer of any skilled negotiator should be  “See these five magic nanotech beans….”

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