The meltdown in the technology sector? Sure, it’s bad. Strained relationships between venture capitalists and their limited partners? That’s bad too. But the single biggest concern among Silicon Valley’s investment community is the difficulty entrepreneurs are having with tight-fisted investors in getting their startups funded.
That was the consensus among venture capitalist, LPs, entrepreneurs and analysts at The Venture Adventure: One Year After. The event, sponsored by Santa Clara University’s Center for Innovation and Entrepreneurship and the Churchill Club, took place last week at the University’s Silicon Valley campus. Panelists included Dixon Doll, founder and managing partner of Doll Capital Management, John Goodrich, a founding member of Silicon Valley law firm Wilson Sonsini Goodrich & Rosati, Nancy Schoendorf, managing partner with Mohr Davidow Ventures and Les Vadasz, president of Intel Capital.
“Are worthy ventures being starved for capital? Terribly so,” says the now retired Goodrich, who joined WSGR in 1970. “It’s not just about money. People are driven to build stuff and those people still exist. The question is: How do you support these people? You do it by restructuring the venture industry so it can take care of those people. Lots of venture capitalists haven’t really addressed this yet.”
VCs these days are steering clear of brand new deals. Although valuations are down across industry sectors, the pace of early-stage investing is down considerably from last year, which itself is down from the go-go days of 2000. In the second quarter of this year, 207 startups received first-round financing totaling $1.2 billion, down from 313 companies that pulled in $1.8 billion during the same period a year ago, according to Venture Economics.
Part of the problem is that the venture capital industry itself is going through a shakeout. Some are closing shop, some firms have already merged, while others are scaling back their funds and reducing the size of their partnerships. “I’m glad the tourists have gone home. I wish more of them would,” says Schoendorf of Mohr Davidow, a firm that in January cut its $850 million seventh fund by 20% to $680 million.
“All the young people that came into the industry need to go out and get a real job with a real company with real profits,” says Doll.
When the shakeout shows signs of waning only then will investors be willing to take on the risk of investing in new companies, but entrepreneurs will have to prove they have more than an interesting technology and a strong management team to secure funding. A startup needs to based on real innovation, more than just a single product, have multiple paths to liquidity and tight execution among its management, says serial entrepreneur Judy Estrin, chief executive of Packet Design.
Still, Mohr Davidow’s Schoendorf warns entrepreneurs not to despair: “There’s still people willing to take risks and get up in the morning because they love doing something. I encourage all of those that have entrepreneurial ideas out there to go for it.”
Contact Carolina Braunschweig