VCs to Entrepreneurs: Outlook for Software Startups Is As Good—or Bad—As Ever

When the moderator for a panel discussion about the venture outlook for 2009 begins by saying, “Everyone knows it’s really bleak right now,” it’s a safe bet you’re not at a chapter meeting for Optimist International.

But a venture overview yesterday organized by the San Diego Software Industry Council seemed to run against the current of totally gloomy expectations, with three California venture capital partners saying, in effect, “it’s bad, but it’s not that bad.” As a result, a kind of irony permeated their discussion, with the VCs telling entrepreneurs in the audience that their odds of getting funded were never very good in the first place.

“My own personal assessment is that nothing has changed,” said William Quigley, a blunt-talking managing director at Clearstone Venture Partners, which has offices in Menlo Park and Santa Monica, CA. “I want to invest in very few startups.”

Prashant Shah of San Francisco’s Hummer Winblad Venture Partners agreed, saying his firm reviews proposals from about 2,000 startups a year— and only about 200 are appealing enough to warrant meetings. Shah added that the number of venture deals has been pared even more. “In 2008, we did five investments, so that’s about 2.5 percent,” he said.

Quigley rejoined, “Most of what we see are not good ideas. They’re crappy ideas. Some people don’t realize that you’re not going to raise capital when the total market you’re looking at (for your startup) is $5 million. And you’re not going to get funded when you need to raise $300 million to get to break-even.”

In this respect, Quigley and Shah maintained that hard times … Next Page »

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Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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3 responses to “VCs to Entrepreneurs: Outlook for Software Startups Is As Good—or Bad—As Ever”

  1. Matt Perez says:

    I heard pretty much the same story at an Angel’s panel on Monday night (1/12).

    One thing HAS changed: valuations are much lower now. They said to expect to give up 30% for $1-2M from Angels and 50% for $5M from VCs. What that tells me is that now more than ever you should try do as much as possible with your own sweat capital and go for the big boost only when you have a position to negotiate the valuation. We work with really small start ups, and several of our clients are doing just that.

    The other possibility is to look at Y Combinator and others like it that do pre-Angel funding. They seem to be a better fit if all you and your team needs is enough cash to survive for a few months and good advice from people who’ve “been there, done that.” (I don’t have anything to do with YC, I just think it is a good option.)

    cheers — matt

  2. I really wish we’d get over all this hand wringing. Yes, financial risk is up, but that is not the only risk–and not even the most important one for startups. Competitive risk is way, way down. People risk is much improved. Market risk depends on what you are selling (I wouldn’t want to be pushing luxury cars now, but in high tech, we often are selling productivity and cost-cutting tools…seems like those would be in vogue more now). A lot of startups don’t need as much capital as in years past. See my presentation to Boston Web Innovators for more color, particularly on matching startup strategy to investors’.