What's Happened To The VCs?

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 sailors.

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 than that?

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"?
3 comments about "What's Happened To The VCs? ".
Check to receive email when comments are posted.
  1. Mike Patterson from WIP, Inc., January 19, 2011 at 10:30 p.m.

    Cory, I'm sure you're aware of Dave McClure's viewpoint on this matter...if not, his viewpoint is a good one to look into. Early stage Internet companies are now a whole different animal than later stage ones and for the most part traditional VCs have no idea how to invest in these types of companies. As such, I don't see them getting back into the game. They would be better served grabbing the angel investors that already have "skin in the game", partnering with them, and spinning off a new division of their companies that only focus on these early stage businesses...OR develop something of a Polaris Ventures model and keep their ears to the ground by providing early stage co's with space and a communal, entrepreneurial environment in exchange for "looks" into their businesses and management styles.

    Either way, they can't get back into the game in the same form in which they left it...of course they can, but it would be a HUGE waist of money. Investing in this level of companies ($500,000 - $1,000,000), simply won't provide the returns they need to provide to THEIR investors.

    VCs need BIG hits but at the same time, the model of providing $5-10M to a startup no longer works and is no longer necessary. They'll just sit on the sidelines until 2nd or 3rd rounds roll around and hope they can get some of the action.

    The early stage game has completely changed and in my opinion will not come back in the same form.

    Mike Patterson

  2. Kent Speakman from Engageia, January 20, 2011 at 2:08 a.m.

    Great post Cory! Bang on with your observations and points.

    When your ready to create the "welcome back" presetation you have our full support...


  3. Ronnie Perchik from PromoAid, LLC, January 20, 2011 at 5:42 p.m.

    Great blog! I personally experienced this and was able to pivot away from the VC world to Angel Funding successfully. The personal involvment from our Angel's has been a termendous asset and directly related to our growth. The lack of formality in the relationship has also been less taxing on our resources.

    I agree that during this "conservative period" VC's may be locked out of some great investments as the start-ups may not need them to get to profitablity. Only time will tell.

Next story loading loading..