It's a pretty good time to be an entrepreneur seeking money, a decent time to be a venture capitalist, but a terrible time to be exploring a career in VC.
That seemed to be the consistent theme emerging from various panel presentations at the Annual Venture Capital & Private Equity Conference held at Harvard Business School on Feb. 1.
The VC and PE groups are still reeling from the double funk of the dot-com implosion and the ailing economy. The problem isn't necessarily raising funds: The industry has a $90 billion "capital overhang"—funds raised but not yet invested. But deal flow has been cut by a third from levels seen in the mid-1990s, and the amount invested is roughly half that volume, panelists said. The result: Some firms are returning capital to limited partners, foregoing management fees, or moving toward later-stage investments.
Entrepreneurs: Give me the money
True, the size of VC investment in a start-up is smaller (think $2 million, not $10 million), and valuations are much lower. And entrepreneurs have to meet benchmarks like never before or risk seeing the plug pulled on their projects. So why is this a good time to be starting a company?
There is a lot of available money chasing quality opportunities, VC executives said. In addition, talent recruiting is much easier today than three years ago. "There are legions of small teams around Boston looking for the next opportunity," said Mike Hirshland, general partner, Polaris Venture Partners.
| This is the best time in many years to invest, but it certainly shouldn't be considered easy. |
| —Ansbert Gadicke, MPM Group |
Other factors working in favor of startup CEOs: Office space is available and affordable, and the competitive landscape is less cluttered, said Kenneth Morse (HBS MBA '72), managing director of the MIT Entrepreneurship Center.
But in order to attract funding, he continued, an entrepreneur needs an outstanding team, outstanding technology, an outstanding value proposition, an outstanding market, and outstanding customers.
A track record and proven partners wouldn't hurt either. "In difficult times we are trying to reduce risk," said Alan Spoon, managing general partner at Polaris Venture Partners. "We will bet on people we are comfortable with."
Venture capitalists: Back to basics
For many VC and private equity professionals at the conference, the current climate harkens to the back-to-basics years of 1997-98, when many people were fleeing the sector. But in those tighter times, only the best companies were funded, and at favorable terms to early investors. The result? Investments in those years paid off, certainly compared with investments made in the bursting-bubble environment of 2000.
"This is the best time in many years to invest, but it certainly shouldn't be considered easy," said Ansbert Gadicke, founding general partner, MPM Group.
VCs are benefiting because they can now do deals at reasonable valuations, and with slower cash burn rates in their portfolio companies, panelists said.
Investors also now have time to perform proper due diligence, said Chip Hazard (HBS MBA '94), a managing general partner at IDG Ventures. "In the heyday, you would see [a proposal] on Monday and have to present the term sheet on Friday." Now, he said, you have up to five months to perform due diligence. That time also allows a stronger relationship to build between VC and entrepreneur.
The get-rich-quick schemers who started a business just to cash in and get out are largely gone, panelists said. "We're seeing better management teams," and teams with few expectations of doing quick IPOs, said Thomas Rosenbloom, of Epstein, Becker & Green, P.C.
The downsides in this environment? Funds must nurture their portfolio companies longer than in the past, so syndicates are coming together that spread the risk and reward.
Also making a VC's life more difficult, said Mike Brooks (HBS MBA '73), a general partner at Venrock, are corporate governance reforms such as the Sarbanes-Oxley Act of 2002, which makes its more difficult for venture capitalists to participate on boards of directors of their portfolio companies.
The capital overhang has created a kind of rush-in mentality, several VCs said. Because there is such reluctance to pull the trigger on a deal, when a pioneering deal is done, the rest of the industry piles in to fund similar ventures, blunting competitive advantage. "We ask, 'How many different people are looking at this?'" Hazard said. "How long do we have the runway?"
| There are legions of small teams around Boston looking for the next opportunity. |
| —Mike Hirshland, Polaris Venture Partners |
I want to be a VC
It's already difficult for newcomers to get into the VC field, and it's only going to get tougher, panelists said, thanks to continuing consolidation among venture firms and fewer funds rolling out.
"This industry is going to shrink" over the next three to five years, said Brooks. What's worse for young VC candidates, firms haven't transitioned to younger partners. Partners who might have retired a few years ago were kept in the game by the tremendous wealth generated by the bubble.
Advice for job seekers was given freely. Henry McCance (HBS MBA '66), a general partner at Greylock Partners, suggested that MBAs offer their services without pay to VC firms for several years in order to study deal flow. When Tullis-Dickerson & Co. interviewed for two associate positions, candidates who combined a science background with savvy people skills made the short list, said CEO Jim Tullis (HBS MBA '72). The key in this industry is to create relationships with portfolio CEOs and get them to accept your advice, he said.
Gadicke suggested that VC wannabes first get experience in the industry they later want to invest in. And Bryan Roberts, a general partner at Venrock, said small-company experience is helpful, so you have insights to share with your portfolio CEOs.
Notes from other sessions:
Biotech industry: Fewer but better companies are being funded with bigger dollars, said Gadicke. And product companies are being favored over technology companies. "It's not getting easier, it's getting harder, but potentially much more lucrative for those who do it right," said Tullis.
Software industry: Start-ups have a high bar to jump to entice investment. Companies are being built on $10 million to $20 million in capital with strong intellectual property, said Joel Rosen, a venture partner at Charles River Ventures. Software opportunities identified by panelists included anti-spam, financial services, security, and Web services. "We look for gaps in businesses, and look for opportunities in those gaps, said Roger Hurwitz, a partner with Apex Partners.
Media: Panelists see no signs of an immediate turnaround in media advertising, but the worst of the industry's recession may be over. The popularity of "rollups," attempts to achieve economies of scale by integrating various media properties (read AOL) appear to be dimming. The problem: Rollups can be difficult to execute and require tremendous attention from senior managers. Too often the customer is forgotten, said James Wilson, a managing director at Boston Ventures. "I hate them."