The “Least Worst,” General Catalyst’s Two-for-One Sale, Turning Your Umbrella Upside Down, and Other Gems From Xconomy’s Star-Studded Venture Panel

“The rest of the economy is now dealing with the uncertainty that we deal with every day in a good economy. We do that by choice, they’re doing it now out of necessity.”

The scene was XSITE, the Xconomy Summit on Innovation, Technology, and Entrepreneurship, held on June 24 at Boston University. The speaker was Noubar Afeyan, managing partner and CEO of Flagship Ventures. The question he was answering dealt generally with how the economy has affected the venture capital business. He continued the statement with the glass-half-full conclusion that because VCs are so used to dealing with uncertainty and risk, “Our world has gotten the least worst.”

It was a beautiful close—to audience laughter and applause—to a keynote panel on Innovating Early Stage Venture. To me, it’s also a nice opening to this week’s column, which is focused on the uptake from the session. The panel didn’t do as good a job as it could have with the core topic—i.e., how is venture capital reinventing its own models in these tough times (more on this below). But panelists did provide some interesting insights on issues ranging from how to cope with the current economic malaise (that’s an upgrade from outright disaster) to their thoughts on Greylock Partners moving its headquarters to Silicon Valley to how and whether to seek federal stimulus money.

Before we dive into the details, though, here is the lineup of who appeared that day (thanks to you all!):

—the aforementioned Noubar Afeyan
—Joel Cutler, co-founder and managing director, General Catalyst Partners
—Bob Higgins, co-founder and general partner, Highland Capital Partners
—Eric Paley, co-founder and general partner, Founder Collective
—Jo Tango, founder and partner, Kepha Partners

Their moderator was Michael Greeley of Flybridge Capital Partners, chairman of the New England Venture Capital Association. He did a great job keeping his squad team of panelists on its toes by asking pointed questions and bringing out the insights below.

‘Cut, Cut, Cut’ is only part of the story for entrepreneurs coping with the current economic climate

Afeyan took issue with the hoopla raised by West Coast VCs (i.e. Sequoia Capital Partners) last fall when they publicly advised startups to cut expenses hard and fast in the face of the recession. Cutting is only part of the challenge, Afeyan warned, saying you can’t cut expenses without a commensurate cut in goals.

Connections are more important than ever in this economy, someone pointed out (sorry, I missed who). That’s presumably because everyone is so busy trying to cope with the downturn that any edge a good connection can provide—in solving a problem or getting something done faster or more efficiently, etc.—is magnified. I took this to mean: make leveraging connections a bigger part of your mindset, whether that means reevaluating connections you already have, or by looking at the connection potential partners or investors bring to the table.

Is the recovery already here for VCs?

A series of snippets on this topic:

—Higgins: “Things really were, I think, back to normal in the spring of ’09.”
—Tango: Deal flow is up 25 percent for Kepha. That’s when looking at the last three quarters on an annualized basis, versus annual figures from past years. (“We wanted to see how were doing since the September 08 stock market crash,” he explained to me in a follow-up e-mail.)
—“We’ve been really busy,” Cutler agreed, adding, “There’ll be plenty of money for good firms.” Then he seemed to catch himself just a bit, saying, “There’ll be enough money.”
—Afeyan: “The exit environment seems to be turning.”

On innovating in venture—early stage or otherwise

I think the panel came up short on addressing this issue. Greeley did his part by putting the question to his guests in several different ways, one of which was: “How do you react to the question that we don’t take enough risk?”

That led to a long silence that drew laughter from the crowd. Higgins then pointed out that Highland has done 60 seed deals the last four years, of which just 15 went on to a Series A round. “You’ll never hear of the other 45,” he said, illustrating his point that Highland, at least, takes risk. Higgins said that in his view, “The decline in venture capital is not the headline.” It’s the decline in angel groups, corporate venture arms, and hedge funds.

Afeyan also said his company is very active in early stage investing. Overall, he said, “I don’t sense a dramatic change in the amount of early stage risk capital, certainly not in Boston.”

Paley, though, had a slightly different take, at least on the surface. “There is a lot of room for some smaller funds” under $100 million, he said. He also said there was room to find new models for venture funding, or revisit old models with a new eye.

General Catalyst’s two-for-one sale

Following up on the previous question, Cutler put forth … Next Page »

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2 responses to “The “Least Worst,” General Catalyst’s Two-for-One Sale, Turning Your Umbrella Upside Down, and Other Gems From Xconomy’s Star-Studded Venture Panel”

  1. One one hand, I know of several startups that look great to me, but which have been unable to get any funding at all. Several are on the back-burner, or on a low boil (people working 10 hours a week or not taking any salary) as they keep searching for funding.

    On the other hand, at Common Angels, we are seeing a lot of startups that I feel are very exciting and promising. I am personally having a hard time as an investor because I wish I could invest in each one of them!

    It seems to be an unusually vibrant time for startups. To reiterate some points recently made by James Geshwiler (on Jun 11):

    – If your product is aimed at companies, and its value proposition is that it saves the company money, a recession is a much better time to sell your product than a boom time. Companies are thinking a lot about cost-cutting right now.

    – Sadly, many companies are having layoffs or even going out of business (e.g. Sicortex). But the silver lining is that there is an amazing wealth of top-notch engineers and managers out there, just waiting to join your startup!

    – There will probably be fewer copycat entries to your space, since there is not a flood of VC money available.

    So, now’s your chance to do that startup you’ve been thinking about for so long! But first secure funding or find other creative ways to finance what you need to do.

  2. Dan: thanks for the (unprompted) reiteration of key points. We firmly believe this is a great time both to start a company and to being investing.

    To the point Bob Higgins made about “the decline in angel groups, corporate venture arms, and hedge funds [and we should add certain venture funds as well],” the comings and goings of particular players in the financial markets is part of the economic cycle. It’s not pleasant, but neither is it news.

    The key question is the one of risk: not whether people are willing to accept it or not, but what types. The big one facing every venture investor today is exits and finding liquidity. It’s particularly hard with the top end so heavily truncated even with some recent IPO activity; as NVCA has cited, there are structural problems in the market that have changed the game for big exits.

    I’m quite hopeful and bullish that there is still good money in the average tech M&A zone.

    The trick for entrepreneurs and investors will be to manage capital and expectations to be successful within the parameters the market provides.