The markets have gotten creamed and venture capitalists are wetting themselves, but deals are still getting done -- they just aren't as big or glamorous as they were even a week ago, when eBay bought BillMeLater for $945 million and Cisco Systems dropped $20 million in BlackArrow, an ad management system.
It seems like yesterday -- or maybe last month -- that venture capital firms were mostly concerned with aggressive growth rates and pie-in-the-sky valuations. Now some firms -- such as Sequoia and Benchmark -- are warning portfolio companies to pinch their pennies and scale back on plans. It's a departure from the norm, according to one venture capitalist.
"The idea of building small but interesting and profitable companies is boring to most VC firms. They swing for the fences. They have the get-rich-quick mentality, which isn't just a problem in the VC community, it's also the problem on Wall Street, " says Ho Nam, co-founder and general partner at Altos Ventures. "So what you're hearing from VC firms like Sequoia and Benchmark is a complete reversal from what they were saying even a week ago."
If the tide has changed, the transactions haven't stopped altogether. In the first six months of the year, venture capital firms actually invested $62
million more than there was during the first six months of 2007, according to
PricewaterhouseCoopers' Money Tree survey.
There were five deals announced (and documented by Dealipedia) on Friday, two of which were in the healthcare sector; two were in enterprise communications; and one was in manufacturing. Conspicuously absent from the list were sexy consumer- or ad-dependent tech companies, because, really, who wants to invest in those now?
Certainly not the guys at Sequoia Capital, who noted in a presentation to portfolio companies (which can be found on TheFunded.com) "advertising markets are cracking" and retail and e-commerce "is deteriorating."
It leaves VC firms with fewer potential investments, especially as talk about a green tech and biotech bubble gets louder.
"Web 2.0 is really going to fall out of favor," Nam says. "I think VCs are going to look for small companies that have gotten some traction, and preferably that are profitable. The companies that were burning a lot of capital may and don't have enough cash to get through the next twelve months may disappear. I predict one-third of all venture-backed companies will just go away over the next few years."
