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 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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