Venture Capital Gets a Boost ~ Crack in The Log Jam?

A recent survey of Venture Capitalist by Polachi came out with some interesting findings – one piece of data suggested that over 90% of VCs were either ‘worried’ or ‘very worried’ about exits for their investments but only 40% were worried or very worried about deal flow – i.e. the quality of investment opportunities they are seeing.

So why does the fact that the ability for a VC to exit the investments they’ve made in prior companies matter to Startups and entrepreneurs today? Especially when VCs are still seeing good investment opportunities…

Because those companies that do not IPO or get sold or somehow get taken out of a VCs portfolio start to create a log jam.

Log jam? Of what?

Well – pretty much everything – for example –

The VCs will often have a partner on the boards of those companies within their portfolio – if they don’t ‘exit’ these companies then these partners will often continue on these boards — a person can only be on so many boards and working with so many portfolio companies before they are too stretched. VCs spend time with their portfolio companies – they may help with recruitment, talking to potential customers and so on.

So, no exits – less time available for new investments.

Also consider cash – if there is no IPO or sale then the portfolio companies may need additional rounds of funding – perhaps above and beyond what was originally anticipated – this means additional funds are committed to the existing portfolio and cannot be made available for new investments.

It shifts the role of VC towards a higher percentage of ‘gathering’ rather than ‘hunting’ for new, fresh opportunities.

One rule of thumb I’ve heard is a VC needs approximately $50M available for investment per partner – no exits, less cash coming in, more cash dedicated to existing portfolio, valuations probably set at pre-economic downturn high levels and before you know it –  it all starts to look a little like the mortgage crisis where folks can’t sell their overvalued assets…

But – this quarter – there was a ray of sunshine perhaps (perhaps...) breaking through the clouds…

…in Q2 09 there were five VC backed companies who IPO’d .

So what…

So what?

This is versus ZERO in Q2 08.

Now five IPO’s is not a rush to exit – but perhaps…just perhaps, its a crack in the log jam…

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Andrew

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