NEW ENGLAND CAPITAL VENTURES

2009 Venture Capital Outlook

1. Early State Funding Gets Harder: Does not matter what industry you are in, funding your start-up will get tougher. Majority of deals in this stage are funded by angels, grants and from personal sources. But as we all already know, portfolios have been hurt bad and angels are not going to shell out that $100,000 - that easily and that fast. There is still money available, but only for solid business plans lead by experinced teams with a clear path to subsequent investment rounds on a realistic exit strategy. This might be good as well as bad for institutional folks as more deals get channeled towards them, the trick as always, will be to attract the right deals. Getting in early with any deal is a good thing for institutional folks as it gets cheaper for them to raise the bets and manage their fund's risk. This should continue into Q2 2010. Most Angel groups in the Boston are funding fewer deals compared to past years and independant angels I know plan to stay-put through the year. I don't know how direct I can get here.
2. Institutional Folks Raise The Stakes: as leverage from banks and other traditional financial sources gets tougher to get. For an existing deal (i.e. someone you have already invested in), VC's are anticipating getting into more expensive and additional subsequent rounds than they had originally anticipated. For new deals, VC's want to know upfront how much money you will need, how soon and what you plan to do with it. They will expect you to run a lean organization and will expect faster rate of returns. Thus, your spending plan will need to be tighter than ever before as will your revenue model. They want better assurance on future valuations. Realistically, as mentioned in several of my posts before, it is impossible to assess correct valuations even 2 years ahead, let alone 3 and 5 year predictions on your EBTDA. But go with the game plan as these guys are the ones that will fund your idea - not your accountant or your lawyer or your mother.
3. IP Commercialization Slows Down: Most VC's I know don't have time to 'create' companies now-a-days. They're too focused on existing investments making sure they don't go under. I am not going to spend 6 months making sense of an idea from a lab when I have millions tied into investments I should never have made in the first place. I either need to get out or sustain for the next 2 years to make a return. Face it - patents are useless. Unless it's the next Google. Problem is, I don't think any VC on Sand Hill Road identified Google as a good company to invest in when they were trying to raise money. :)
4. Life Sciences Gets More Attention: Not saying this just because I am in life sciences. But look around you - healthcare in the US is a royal mess. In crises come opportunities! Delivering, sustaining and receiving healthcare is getting unaffordable on all angels. I know people with no health problems, making $250k a year as indepedant consultants, unable to afford health insurance for their family. Just 10 years ago, they were full covered. Access to care, medication adherence and management, health maintainence, concierge care, home care, self care and self reporting devices and tools (e.g. injectibles, monitoring devices, HealthPortals, etc) are all areas that need significant improvement. Forget nanotech, genetics, semantic web, and telemedicine for now. Let's get the basics right and focus on the infrastructure that we will need in the future, before things start getting ugly. I am not ignoring R&D, trials & epidemiology for new procedures, drugs and therapies; I am sure these will continue with Obama & Co's aggressive healthcare agenda and pharma's seeking new revenue lines. I am talking about business plans that will have short term operational impact and will allow us to execute care on a better playing field.
5. Fund of Funds - A Dying Breed?: Questioning the rationale behind FoF here, even for bigger firms ($1B+). Caught between scandals and massive market volatility, newer funds may decide to reiterate their strategy and focus more on direct investments rather than trying to play the market or trust others on their direct investments (I am not giving my money to another venture fund - yes, this does happen). I am no expert in managing FoF structures for any fund, but I think this is a hedge strategy to mitigate return risks decided by firm and its investors. Besides, the Hedge Funds goons and non-traditional private equity funds are in a trouble of their own.
6. Few Newer Funds and Shrinking 'Next' Funds: US is facing serious credit access and the amount of leverage corporations and individuals enjoyed in the past 5 years was by far the best we have seen. Unfortunately, good times are often short lived. I am anticipating far fewer newly created funds coming out in the market and existing institutional folks raising smaller funds as their next fund. I am sure there will be exceptions to this arguement but understand how VC funds are created and you will realize why I make this statement.

That's all I have so far in my bag of tricks! Some might agree with me while some might not. I want to talk to people who don't agree with me to understand why. And if you have additional time, click on the links to some key words highlighted to read contexual arguements crediting my analogies.

Happy New Year . . .

posted by Janak Joshi @ 1/03/2009 09:37:00 PM