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….”
Creative Destruction - Hindu Style
In October 2008, I was asked at the World Economic Forum along with other experts to address the main challenges facing nanotechnology. While environmental, health and safety concerns had been the preoccupation of many for 2008, this question posed by the WEF combined with the world economic crisis led me to consider the challenges of funding and commercializing of nanotechnology and other emerging technologies for 2009.
We can expect to hear much more of Joseph Schumpeter’s ideas of Creative Destruction this year as the world comes to terms with the credit crunch, or recession as these events used to be known. While the depths of a recession can be the best time to start a business, Microsoft is an oft cited example, this is scant consolation for the tens of thousands of companies that will not survive, and the millions who will lose their jobs as a result. An alternative scenario is Nietzsche’s earlier Shiva inspired version of creative destruction, with the new morality standing in the ruins of the old, which may be the long terms fate of a number of financial institutions and economies.
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Following hot on the heels of Nanosight’s recent successful fund raising comes news of another UK nanoparticle related company attracting a significant amount of capital. On the other hand, there are a number of high profile failures taking place at the moment, and that will only increase.
Michael Copeland at Fortune wrote an excellent and much quoted piece called “Venture firms brace for cash crunch” highlighting the problem that many funds will be experiencing when they make future cash calls on the limited partners who include banks, insurance companies and previously wealthy individuals. Add to that Sequoia Capital’s recent doom laden and much discussed presentation and you can see how the number of cash starved start ups will only increase.
A recent article in Private Equity Week illustrated very succinct why the VC model isn’t working:
“Since 2001, there has been virtually no market for VC-backed IPOs. For example, over 19,300 U.S.-based companies have received VC funding since 2002, but there have been only 351 VC-backed IPOs in the same period. There have been some ebbs and flows, but outsized VC returns were largely based on an IPO market that really hasn’t existed for nearly a decade. It is the primary reason why the median venture funds from 2002, 2003 and 2004 are underwater.”
If at first you don’t succeed….Nanodynamics, one of the raft of diversified nanotechnology companies under pressure from investors to get an exit of any kind, have announced that they will be the first nanotechnology US company to be listed on the Dubai International Financial Exchange (DIFX).
You have to question the sanity of both the management and their advisors as pricing is expected to start next week.Nanodynamics attempted an IPO last year but shelved it after investors thought that raising $90 million on 2006 sales of $4 million may have been a bit too much risk to take. However, as the company was reported at the time of its last IPO attempt to be losing $1.5 million a month you can understand their need for capital.
The global credit crunch was the excuse for pulling out last time, and we can only assume, given the sea of red that covers trading screens from Tokyo to London this week, that the company is in quite desperate straits or is hoping that that Gulf based investors are dumber than those on Wall Street. The company claims to have chosen Dubai because “we are a global company with partners and customers around the world, including Europe, Russia, India, China and Japan.”
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