VC Industry


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.  If your VC is reluctant to schedule the partner meeting by the 23rd it’s a clear signal that they want to wait until the new year (or they aren’t committed to your deal).

So why is Funding Season over for the rest of the year?  The VC process is almost universal in how it works across firms.  You meet an initial person from a firm – an associate, a principal or a partner.  If it’s one of the first two you’ll probably meet a single partner before coming into a full partner meeting where (by definition) all of the partners will be in attendance.

It’s true that some VC’s will work a few days of Thanksgiving week and many will work the first 2 weeks of December.

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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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This is part of my ongoing series “Start Up Advice” but I’d really like to call this post, “VC Advice.”

If a company has reached a level of success, has been around for a few years and you believe the company has potential to break out into a much bigger company then you should let the founders take money off of the table.  It’s that simple.  Only then are you truly aligned.

Not FU money, but “feed the family” money.  And to be clear – I believe it is also in the VC’s interests.  I’m not trying to open Pandora’s Box and suggest all founders should be able to cash out – far from it.  But the handful who are building something of substance need to be able to take the pressure off in a way that creates a similar objective to the VC.

I think too many VCs simply don’t understand this.

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