Its been a while since I've updated my blog and I thought I'd provide some thoughts here on what's happening lately for us and the companies we see around us (some portfolio companies and some that aren't)
We continue to stay active. We announced our investment in Raleigh-based Global Value Commerce recently. We have known these guys for a couple of years and they fit nicely into our portfolio as a fast growing e-commerce company. We love the team there and introduced them to their COO (former exec from Art.com).
Slowdown in growth and cutting expenses. Almost across the board, we are seeing massive slow down in growth. Companies that used to grow at 50-75% year over year are now growing at 10-15%. With the slowdown, many companies have been forced to reduce expenses. Usually, this is headcount and marketing expenses.
Capital is scarce for everyone.
1) For the seed companies:
I know the entrepreneurs that are trying to raise money in NC say capital is scarce for the seed stage companies. They blame the geography. Well, it goes well beyond just being a North Carolina problem. It is scarce in other geographies like Atlanta and the Mid-Atlantic and I've even heard entrepreneurs complain in Boston too. What's happening is that the typical early stage investor can wait and get into a company with let's say $3-5m in revenue at reduced valuations. We are seeing lots of other firms see this and some VCs are totally abandoning investing in seed stage deals because of the new "value" by investing in companies built out with a team, technology and customers. My message to the seed stage entrepreneurs: be flexible with your valuation recognizing this trend.
2) For the later stage companies: And for entrepreneurs running late stage companies, the "next round," has vanished and those same companies are throttling back, laying off people and racing towards profitability. For some of them, it is all about eliminating the reliance on VC funds at all costs.
Shakeup in the VC industry. Locally and nationally, we will continue to see a weeding out in the VC industry. In my opinion, it is an industry that has incredible barriers to entry, but long staying power since VCs tend to be able to survive for a while off of fees. Some of this may be healthy. Less VCs means less competition for deals, which potentially mean that valuations will get back to a more nomal level.
I am also seeing a lot of firms staying on the sidelines in 09 and even though they have cash, they are playing it so conservatively and keeping the cash for existing portfolio companies.
Exits? What exits? So, there are none. So, I had coffee the other day with the head of corp dev/M&A for a public $4 billion software company. They have invested and/or acquired 25+ companies in the last 5 years. They are still looking, but here is what he told me: "If a company approaches us and wants us to buy them and they have a great technology but are losing money, I wouldn't even take it for free." So, yes maybe short sighted, but he is focused on protecting EPS at all costs.
And the companies that are in a position to acquire other companies are pushing down the prices to firesale-like prices.
Extending runways. For the companies in our portfolio that are burning cash right now (and that # has shrunk dramatically), we are doing everything we can to make sure they have 2 years of cash in the bank. We don't want their future dependent on securing a new investor. And we are preparing our companies for the market to get worse - if that happens. It is all about survivability. Its easier to press the pedal down later. Opportunities! I should have put this first rather than last since it should be top of mind for everyone. I continue to feel this is a great time to innovate and start a new company. Looking around all the big public tech companies are cancelling new projects, laying off the staff that worked on them. They are becoming much more laser focused on current, to be read as profit generating products. So, the time to go after them should be now as become more conservative. Of course, not to mention, all the economics in starting a business favor you now - lower IT costs, lower rent, fees for lawyers & accountants are lower, people are less expensive and more willing to jump ship, etc. You are in the driver's seat to negotiate everyone down to help keep startup costs low.