I recently read a report that broke down the trends in venture capital investments from 2010. I was most intrigued by the fact that venture capitalists appear to be laying off early-stage
investments and focusing their efforts on later-stage companies, leaving the early stage and seed investments to the ever-expanding world of the Angels and Super Angels.
This is a trend that's
readily apparent in the Valley as well as on the East Coast. I personally think the whole trend dates back to the now infamous "R.I.P: Good Times" presentation distributed by Sequoia Capital a little
over two years ago. In that presentation, Sequoia advised its companies to make cuts and hold onto money because the recession was going to be a long and arduous ride, and additional investment was
going to be hard to come by. The presentation went viral, signaling a change in the mindset of most VCs and definitely their portfolio companies: Everyone basically decided to batten down the
hatches and ride out the storm.
Of course that presentation didn't stop new companies from forming, but these new companies are scrappier than they were three or four years ago -- and the
entrepreneurs behind them are scrappier, too! They're very interested in getting profitable quickly, and with as little fundraising as possible! That trend is one I wholeheartedly support, because
it means businesses are being evaluated more cohesively, and business owners are being more intelligent and more thorough when they launch -- rather than raising millions and spending like drunken
This new entrepreneurial mindset is a breath of fresh air -- but the VCs never seemed to recover from the Sequoia presentation. I know a number of great businesses that have folded
up over the last two years simply because they couldn't raise the seed money that they used to get from the VCs, which now seem gun-shy. The angels are now the go-to-group for early stage
investments, and the VCs are networking with those same angels to provide Series A or B investments to those that "graduate to the big time," so to speak.
I can't decide if it's good that
angels are now taking over this aspect of the business. The angels are dominated by a number of very wealthy individuals and a strong number of angel groups. The rest of the angels are
entrepreneurial minds with some discretionary savings and a taste for the start-up world. These are people with a passion for the business, who tend to get very involved in their investments to make
sure they get a positive return. These start-ups are scrappy, but the angels are scrappy, too! What I find interesting is that when scrappy entrepreneurs and scrappy investors get together, good
things can happen. These companies could take off, fast becoming profitable on their own, possibly not needing the VCs in the long run. The long-term consequences of the shift in the VC world could
mean that there will be fewer companies for the VCs to invest in later -- because these companies simply may not need them! Additionally, the VCs have always liked risk; that's their business. They
all shoot for the fences trying to find the next Google, but what if they all bypass this next generation of companies, and the Google of the future doesn't need their money?
I feel like the
pendulum has to shift back at some point and the VCs will jump back into the early-stage investment arena, but I wonder when that will happen. Will it be in 2011 or 2012? Maybe some time even later
The next 18 months promise to be an interesting period. The economy is showing signs of life, and new companies are showing life as well. How will the VCs react -- and who will
write the next big viral presentation, entitled "Welcome Back, Good Times: Let's Take It Easy This Time Around"?