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

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have not changed the venture outlook for 2009. “If you have a good idea, there will always be interest,” Quigley said at one point. “Whatever people were telling you that you needed a year ago, you still need to have.”

But the economic downturn and dearth of IPOs have changed other aspects of the VC business. Many venture-backed startups are extending their rounds instead of moving to next-stage funding, which prompted Shah to quip, “Flat is the new up.”

About 50 software industry executives signed up to hear the VCs’ mix of optimism versus long odds. So many people signed up, in fact, that surprised organizers had to scramble at the 11th hour to move the event from the DLA Piper law firm’s San Diego office to a larger conference room at the Embassy Suites Hotel.

All three VCs on the panel said they provide seed-stage and first-round investments to startups. “What’s changed for us is that the gap has widened between angel money and Series A financing,” said Brian Garrett of Santa Monica, CA-based Crosscut Ventures. Garrett said he oversaw a $1 million investment last year in GumGum, a Santa Monica content-licensing business. “That was enough to fund them into 2009,” Garrett said. “Now, if I had it to do over again, I would have funded it into 2010,” so GumGum could avoid the challenge of raising another venture round later this year.

As a result, Garrett says his firm is putting more money into its early stage deals, “just to make sure these guys have enough runway.”

On the other hand, Garrett says VCs are doing fewer big deals in the $25 million to $50 million category, and deals exceeding $100 million have evaporated. Venture capital firms in general appear to be moving to smaller funds and smaller deals “as the only way to get a viable return,” Garrett says. Other VC firms also have been shifting their focus from Series A investments to later-stage rounds, thinking that will lower their investment risk and enhance their odds for success. It might seem contradictory, but Garrett says the best entrepreneurs understand such nuances, and there’s always hope for them, whatever the market conditions might be.

As Shah put it, “The one thing that a Series A company has that a Series B company does not is hope, right? Because by the time you get to a Series B round, what you need is proof.”

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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’. http://www.slideshare.net/dbeisel/angel-venture-capital-finance-where-is-the-money-moving-presentation?type=powerpoint