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‘Never waste a good crisis’ – Venture capitalists see opportunities, changes ahead

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The National Venture Capital Association and Deloitte selected a number of reactions from venture capitalists participating in their just released global survey. Those comments:

On Ongoing Optimism During Challenging Economic Times:

“Never waste a good crisis. A number of VCs compare today’s environment to tech's nuclear winter in 2000. But in the last such "winter," digital media and the Chinese market emerged and entrepreneurs seized upon tough times to start their businesses. Today, we are on the cusp of the next wave of disruptive technologies with next-generation Internet platforms driven by SNS [social network services] and online games. The cleantech sector provides upside for renewable energy, efficiency and natural resource management, and VC-backed technologies including water disinfection, solar panels, gridscale storage or solid state discs can play a key role. Lastly, a rising middle class in developing countries will fuel excitement and adoption of transformative technologies. Now is one of the best periods in the VC industry to invest.”

-- Dixon Doll, co-founder and general partner, DCM

“This year and next should be an attractive time to make new venture investments. The pace of technological change continues to accelerate and there is no shortage of great entrepreneurial ideas. Yet many of the sources for funding away from institutional venture capital have shrunk dramatically. Angel investors, corporate investors and hedge funds have all cut back or disappeared. Entrepreneurs are realistic about what kinds of venture deals can be done in this environment. So we feel there is now a great opportunity for venture capital firms to back great teams building leading technology companies.”

-- Sandy Miller, general partner, Institutional Venture Partners (IVP).

“If necessity is the mother of innovation, scarcity just might be its father, or at least an uncle. While the current economic crises is different from the “tech recession” we experienced after the Internet bubble burst, there appears to be enough striking similarities to suggest that now is one of the best times to be investing in innovative early-stage companies. Altruistically, the supply of available talent continues to increase, the costs of the production tools (e.g., computers, equipment, etc.) have become more favorable, and market dynamics will improve for those early-stage companies that are able to find capital. The fact that valuations of such companies continue to become more favorable for those investors with the capital to invest doesn’t hurt either.

-- Marc Averitt, managing director, Okapi Venture Capital

“We continue to believe in the strength of global technology innovation and entrepreneurship. Challenging economic times present an opportunity for companies to outperform their competition with cool and exciting new products and services. Intel Capital is not wavering from its commitment to invest in innovative companies at all stages, around the world.”

- Arvind Sodhani, president of Intel Capital and Intel executive vice president

On Shifting Strategies vs. Staying the Course:

“In this environment, it pays to be either a very early stage investor or a very late stage investor. The classic Series B round, where a business is still finding it legs and remaining capital requirements are at best an estimate, carries more risk given higher burn rates and the climate’s uncertainty around future financings. We are thus seeing reduced investment levels as firms either invest smaller sums in very early stage companies, or invest traditional sums in fewer and much later stage companies. The middle ground has been largely vacated.”

-- Steve Fredrick, general partner, Grotech Ventures

“We have not altered our fundamental strategic focus on early-stage healthcare investing in response to the recession. That said, new market realities and lingering uncertainty have factored prominently in our decisions about which specific opportunities to pursue of those consistent with our strategy. Over the last eighteen months, we passed on several otherwise attractive companies that were too capital intensive or had too much future syndication risk for today’s capital markets.

These would have been investable situations a few years ago, and may indeed become so again at some point in the future. But in the current environment, we are opting for fewer, more capital efficient deals in which the existing venture syndicate has enough reserve capacity to fund a company if necessary all the way to cash flow independence.”

-- Kevin Lalande, managing director, Sante Ventures

“This recession has reinforced our decision to target and invest in next generation internet applications that enable transactions for businesses and consumers alike at much more attractive price points. The revenue growth within Safeguard’s technology portfolio, although somewhat abated due to the weakened economy, is growth nonetheless, while many enterprise and business software solutions have experienced significant revenue contraction.”

-- Peter Boni, president and CEO, Safeguard Scientifics

On the Changing Limited Partner Landscape:

“LPs were cutting their venture allocations and number of managers before this economic period began. Like all good investors, they are tracking results and culling their herd. Whereas they may have taken more risks in years past to increase their dollars or number of investments, no doubt the jury is starting to come in. That said, we are confident that LPs will act rationally as they make decisions with regards to this asset class and all others. Venture is still popular class for LPs to invest, if they can find the right groups. I would think they, like VCs seeking great entrepreneurs everywhere, are seeking great VCs everywhere. It makes perfect sense.”

-- Ray Rothrock, managing general partner, Venrock.

On the Acceleration of Globalization:

“We look at the global opportunity with a slightly different twist: We agree that there is tremendous opportunity in the non-US economies that will drive global financial growth over the coming decades. However, we believe that the best way to build financial value for LPs is to invest in innovation here in the US that accelerates solutions to global challenges in physical and digital infrastructure and sustainability. The US continues to lead the planet in research and innovation, and we are investing the entrepreneurs who are aggressively launching US innovation into global markets.”

-- Kim Sanchez Rael, partner, Flywheel Ventures

“Competitive necessity – those who don’t adapt are doomed to die. The lines between whether a company is American, Asian or European are blurring because by necessity many start-ups today have multiple offices. Entrepreneurs can start companies anywhere they want in the world and pick locations where conditions are favorable and talent pools are available at reasonable prices.

“However, in a world where the interdependency between the top 3-5 markets, especially in the Pacific Rim, is ever increasing in magnitude and influence, the best financial returns will be generated by firms who excel in synergies in knowledge arbitrage, funding and business development across the top global markets. Innovation in the next decade will be led and driven by the Pacific Rim – that’s where the action will be.”

- David Chao, co-founder and general partner, DCM

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