LPs are ticked off. The economy is stuck in neutral; venture firms are triaging their portfolio companies; fund sizes are shrinking; and the IPO gridlock continues.
Those are the good things about the venture capital industry. Just kidding. Veteran VC Edwin Goodman, who says he makes his living being an optimist, paints a fairly dour picture of the venture capital industry, circa 2002.
Goodman, founder and general partner of Milestone Venture Partners, a New York-based early-stage firm, weighed in on the 2002 venture landscape during a recent conference and sees a lot of challenges for GPs and especially entrepreneurs. In the middle, LPs are griping.
“I see a lot of hesitancy all along the line, a lack of certainty about the direction of economy,” he says. “Many venture firms will wait until their comfort level improves before investing again. In the meantime, there will be a lot of portfolio nursing; [VCs] don’t have the resources to look at new deals.”
Among the trends Goodman sees are GPs returning capital to their LPs and a shrinking size of funds. “For the first time in memory, I see a confrontational approach between LPs and GPs. Disappointment over bad investments in some cases has led to litigation. The relationships are important, so people are moving gingerly, looking to make amends,” he says.
To ensure financing these days, start-ups better have a complete product in the pipeline, some revenue on the books, and real customers. Otherwise, their business model may not pass muster, says Goodman.
Low burn rates and positive cash flow are in. Capital intensive businesses, for the most part, are out.
Milestone focuses on Internet infrastructure and business-to-business companies in the New York area, and Goodman remains a big believer in the Web. “I think we’re about to experience the second wave of the Internet Revolution – and it will last a few decades,” he says. “I can’t think of anything that would be untouched by the Internet. It’s enabling existing companies, and creating new applications.”
Taking a contrarian view, he sees a real future for business-to-consumer Internet firms. “In that first rush, people didn’t tailor their approach,” he says.
Two sectors that Goodman likes are pharmaceuticals and security. Of the former, he says many products are about to come off patents, and that spells opportunity in an aging America. First-movers generally fair better in this space, he says, “because if you can get to market a day earlier with a product you can save $10 million or make $10 million.”
The main story of the times is that “it’s terrible to be invested, but wonderful to be investing. It’s a difficult time for entrepreneurs; a lack of competitive capital means a slower process. We will talk about terrible returns for another two to three years,” Goodman says.
In a “perfect world,” he sees the public markets actively returning by 2004, 2005. That would mean investments made last year and this year could reap big IPO returns down the road. “That may not happen,” Goodman says. “But I make a living being an optimist.”
Contact Ken Ryan at: Kenneth.Ryan@tfn.com