Back in June of this year, I did a post called Rough Ride Ahead: Buckle Up & Get Your Money Now (if you can). My words of advice were:
investor, do what you need to get it closed now. If you have access to
capital, draw it down and don't touch it as it may need to last a
while. If you have a high burn rate, you had best start aggressively
cutting it now. If you are going into this cycle burning $1m/mo, you
will have no ownership left by the time the cycle turns up and if you
are burning more than $500k/mo, your cap structure is going to take a
hit if things turn out as badly as I fear. In these kinds of times,
breakeven is great (wait out the competition) and $100-200k/mo burn is
Well, things have hit full force and all of the VC's are panicked over the dire situations facing their portfolio companies. Above is a proxy for what most are saying now four months later. Why the sudden sense of urgency? Hasn't this venture market been basically dead for the past couple of months? I can only assume that the market crash has dimmed whatever hope that an upturn was around the corner.
To understand better why the Valley is sweating bullets right now, you have to understand the context of their portfolios. For the past two years, the Valley has felt very confident. They have been investing in an array of companies at crazy high valuations that, in many cases, had not figured out their revenue models. As LP's pushed and shoved into these funds, groups have been able to raise funds roughly every two years. In addition, because they have twice the size of older normal funds, they have added partners and now put twice as many deals into each fund (40+ vs 20+). Lastly, these funds, since 2003, have only had 10-20% realizations.
So, the average branded Valley firm has probably 3 recent funds (and several legacy ones) say in 2003, 2005 and 2007. Each one has 40+ deals and only 8+ exits. So, they have nearly 100 existing portfolio companies plus whatever legacy deals are around going into this down cycle. Follow-on financings have become very difficult and other VC's are getting very predatory in their negotiations. With probably north of 120 children to take care of each, you can see why the Valley is not very happy right now.
This is going to get 2001 ugly for those firms unable to cut burn, grow revenue and get to breakeven. VC's are going to be in triage mode and more likely to let the truly wounded investments go. You entrepreneurs will need to take control of your own destinies or Darwin will do it for you.
In case you are curious what the Valley is advising firms to do, below are the links to several of the more popular VC communications to entrepreneurs about this down draft. Enjoy…