VC Outlook from Draper Portage

Matt McCall (Draper Portage Ventures) wrote a very interesting post yesterday. In it, he describes the current venture capital landscape as having “flatlined”. Matt is an ultra bright, fairly conservative venture capitalist (at least he was way back when Portage was a key investor in one of my past lives – MetalMaker). A good read if you are currently launching a startup, and/or you are seeking funding for one.

I’m certainly not an economist, but I will say this: things could certainly be better. The job market sucks, the housing market is nonexistent in many places, and we’re staring $5 gasoline in the face. But how does it really affect the capital-seeking early-stage entrepreneur? It doesn’t sound like this is a particularly compelling time to start a new venture. Possibly, but not necessarily.

I founded my last company in 2000 – unless you were living on a deserted island then, you will remember how nasty the market was. Nevertheless, through persistence and self-funding, I managed to keep the thing going until I could exit (2005 – when the market was more in my favor). Timing is everything, as they say. Granted, the exit wasn’t overly lucrative, but we made money, and no one got hurt in the process.

I do want to point out one thing, though (and Mike and I are going to discuss this a bit in our podcast recording session later today). If you are an entrepreneur that is banking on someone else’s funding to help you to build, launch, and realize your dream – your expectations were probably out of line to begin with, so now it gets doubly hard for you. I see deals like this all the time (as do most investors):

Acme Software provides a world-changing solution to the way consumers shop online! Our cutting-edge, paradoxical approach to e-commerce will drive us to $1B in revenues in just 24 months. Seeking $5M to hire a team, build out the product, and start selling it.


Sorry, not gonna cut it. This is laughable. Telling an investor that “with my time and your money, all things are possible” is not a value proposition. If anything, it a nice fat red flag to any serious investor that you aren’t a bankable jockey (rightly or wrongly – this is the reality).
A tough capital market makes the second mile on your journey possibly more arduous – however, the first mile should not be affected. Innovate, sell, and meet the investors halfway.

In an underserved market like Atlanta, you are not likely to waltz in and secure a first round of capital with an idea alone (save for the occasional angel that truly gets what you are doing). Even if you have a prototype product, your chances may only marginally better. So guess what? Nothing has really changed for you. However, once people are buying what you’re selling, the opportunity will stand out like a diamond in the rough. This is your challenge.

If Acme came in with this pitch, however, things get interesting:

Acme Software’s beta product currently provides over 50,000 consumers with a very unique way to shop online. For the first 12 months after launch, the company generated revenues of $1M, and we’re now at cash-flow break-even. Seeking $2M to expand our product and to expand our sales efforts.


When markets get tough, investors withdraw. Their margin for error is already small, and it gets even smaller in tight markets (true for most entrepreneurs as well). However, entrepreneurs are in a slightly different position. They have the “x factor” – the gene. The thing that makes them drive for success even through the toughest of times. The thing that separates mid-level Fortune 1,000 managers from someone who will try the unthinkable. When the landscape sucks, it actually drives innovation and resourcefulness even further. A blessing in disguise to a serious entrepreneur. Not the same for investors – they are often content to ride out the storm – as well they should, since they are most likely investing someone else’s money. But if your deal represents a chance to return even a mild multiple in a tough market, you may find takers.

Good deals get funding … still. They likely always will. But proving yourself to be a “good deal” could be getting a lot harder if you are on the uber-early end of the spectrum. So adjust your expectations if you need to, then get out there, execute, and don’t worry about things you can’t control. Turn a bad market into an opportunity to move forward, while many others sit on the sidelines. If you can’t (or aren’t willing to) do this, you are most likely going to find the next 12 months to be a colossal waste of your time, energy, and precious capital.

Of course, if your venture is already off and running, Matt serves up some pretty good advice to try and insulate yourself. Good reading, for sure.

Cheers.

2 Comments

  1. I don’t know if this is still the case, but once upon a time, VCs used to tell me that a recession is the best time to launch a business because by the time you’re ready to sell something, the market is in a broad upswing. Plus, in a recession, you can buy cheap assets in fire sales from bankrupt companies (like ATM Direct for example) and get cheap talent in a loose labor market.

    in my view, the effect of a recession is that there are just fewer funds available for investing. If the high net worth guys’ portfolio value goes down, that’s less cash available to invest. Plus, you tend to get a “flight to quality” in downturns, meaning assets are overweighted to perceived safe investments.

    That having been said, Atlanta seems to be doing fairly well. Even the real estate market seems fairly resilient.

    — mike

  2. Recession? The west coast inst having a recession. They are funding ad,semtech,cleantech like it was going out of style! They fund the people the ability to execute not if you have revenue for some product. There are still those that are locked in old models here (read post product post revenue). Disruptive technologies do not occur with this model. That is the main problem not whether there is quality. the game is back on in the valley and pacnw.

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