VC Industry


This article originally appeared on TechCrunch.

2 preamble issues having read the comments on TC today:
1: I know that the prices of startup companies is much great in Silicon Valley than in smaller towns / less tech focused areas in the US and the US prices higher than many foreign markets. I acknowledged this in the article. You can be pissed off, but I don’t set prices. I’m just making the commentary.
2: As expected at least one person accused me of writing this post because I want to see lower valuations. That’s stupid. I can’t control the market. When prices are too high I just pass. Simple. I wrote this because over the last decade I’ve seen a destructive cycle where otherwise interesting companies have been screwed by raising too much money at too high of prices and gotten caught in a trap when the markets correct and they got ahead of themselves.

I said both in the article but felt compelled to provide a statement up front for the skimmers.

I have conversations with entrepreneurs and other VCs on a daily basis about fund raising, the prices of deals, how much companies should raise, etc. I’ve stopped talking about this as much publicly because it’s such a heated, emotional topic where the points-of-view are strictly subjective and for which the answers will only be revealed in the future.

I’ve decided to take all of my private conversations and subjective points-of-view on the topic and make them public in a keynote speech at the Founder Showcase in San Francisco on June 15th.

I thought I’d post on one of the topics before hand. It’s the one bit of advice I find myself giving most frequently these days, “raise money at the top end of normal.

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This is part of my series on Raising Venture Capital.

I’m sure I’ll spark the ire of some VC’s for saying so, but there is certainly such a thing as black-out days in venture capital.  It’s worth you knowing this so you don’t waste your time.  It’s also very important to understand so that you can properly plan when you raise money.

Let me first tell you the black-out periods and then I’ll explain why.  It is very difficult to raising venture capital between November 15 – January 7th.  It is also very hard to raise VC from July 15 – September 7th.  (you need to have had your first meeting even earlier.)  If you’re thinking about raising VC and have not yet started the process, you’ve probably already missed the boat for 2009.

If you’ve had your first partner meeting but haven’t had the full partner meeting then you had better schedule it for Monday, November 23rd.  Full partner meetings are almost always on Mondays and if it isn’t already booked yet for Monday, November 16th (e.g. this coming Monday) obviously that’s not going to happen.

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Montgomery & Co Projects Deal Volume to Grow by 167% in Just 2 Years with No End to Growth in Sight

On the third Wednesday of every month I co-chair a meeting called the SoCal VCA (venture capital alliance), which represents participants from all of the top venture capital firms in Southern California as well as prominent members of the Tech Coast Angels (TCA).  We meet to discuss trends in the industry and to find ways to work together to help with SoCal deal syndication – somethings that happens automatically on Sand Hill Road in NorCal due to proximity.

We feature a prominent speaker at every event.  This morning we heard from Jamie Montgomery, CEO of the venerable Montgomery & Co investment bank who is at the heart of what is going on in M&A for venture backed companies.  They do around 7% of the total VC-backed deals in the US per year or just under 40 deals / year on average (present year excluded!)

I have to admit that I was greatly encouraged by Jamie’s outlook for venture backed companies, which if true will be a welcome relief for our industry.

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In the first post in this three part series I described why I believe the VC market froze between September 2008 – April 2009.  In the second post I argued that as of September 2009 the pace of VC investments has increased rapidly (at least for software / Internet investments – the only sector on which I’m competent to comment), but only for those remaining VCs who have new enough funds and aren’t plagued by “the triage problem.”  This is a direct result of innovation around the iPhone / mobile computing, Facebook / Social Networks and Twitter (as distinct from Social Networks).  It is also a result of pent-up demand.

In the following post I argue that this increased pace may be temporary.  I obviously don’t have a crystal ball so the economy could fare better than my gut, but here’s why I’m cautious for some time in 2010 or early 2011:

Why is the future still so unpredictable?

1.

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In my previous post, The VC Ice Age is Thawing (for now) I wrote about the reasons why the VC market came to a screeching halt in September 2008 and remained largely shut until at least April 2009.  There are now signs the VC market has gathered pace meaning it’s a great time to be fund raising.  This post highlights some of the reasons why the market is moving again and what entrepreneurs should do about this.

There’s no doubt (at least anecdotally) that the pace of VC investments in early-stage technology companies has picked up in the past few months.   The real irony of the market thaw is that the biggest symbol of the freeze as I mentioned in my last post is when Sequoia released its famous “RIP Good Times” PowerPoint deck alerting companies to dark days ahead and

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When venture capitalists scale back investing activities it can be very swift and leave many companies that are in the process of fund raising hung out to dry.  Just ask anybody who was trying to close funding the fateful week of September 11, 2001 or even March 2000.  I would argue that the shut-down of September 2008 was equally severe yet there are signs that this “VC Ice Age” has begun to thaw.

But any entrepreneurs raising capital should keep in mind that this opening of the markets could possibly be temporary.  They should heed the age old advice that raising slightly more money while you can is always better than trying to optimize future valuations.  This should not be confused with raising too much money as many companies did in 2006-08.

The rest of this post series deals with the reasons why VC froze up in the first place, why investments have heated up recently and why the future of VC funding at the current pace is not certain.

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