Based on data from Venture Economics, the high-tech venture capital industry has just weathered the first 12-month loss in its history. But don’t expect sober reassessments and anxious hand-wringing; the outlook, VCs say, is bright. Whether that’s accurate or merely a reflex remains to be seen. But even as they insist everything is fine, many VCs are adopting new strategies.
Since a quick sale or a boffo IPO seems out of the question, expansion-stage funding has become a bigger part of many VCs’ portfolios. Says Adam Reinebach, vice president of Venture Economics: “In 1999 and 2000 VCs backed a company, gave it a couple of rounds, and took it public within a year. That kind of pace was really unheard of prior to the Internet boom.” Now companies are receiving five or more rounds as VCs wait out a lackluster market.
Meanwhile VCs aren’t very likely to enjoy big cash infusions from pension funds. Reinebach says many pensions have percentage caps limiting investment in private equity arrangements, measured not in the dollar amount invested but in the value of the investments at any given time. Thanks to the drop in the stock market, on a proportional basis many plans have maxed out the percentage of the portfolio they can place with VCs. That’s ironic given that VCs are still providing better returns than the public equity market, but rules are rules.
Got a hot idea? Good luck. Most dotcom funding is now directed toward companies already in VCs’ portfolios.