Looking into the VC Crystal Ball

By Hugh Burnham

Yesterday I attended the Churchill Club’s Venture Capital and Private Equity Outlook Breakfast as a sponsor. If you didn’t get a chance to go, you really missed out, but lucky for you – you can read more about the event here.

About 46 percent of VC financing comes out of Silicon Valley, so the local VC outlook is an important indicator in the economy, innovation, and investors’ appetite for risk.

There was a lot of talk about all the startups that will now fade from existence, because venture capitalists are no longer interested in continuing to fund them. Rich Brenner of The Brenner Group offered some particularly dour predictions. He estimated 40-50 percent of venture and private equity funds will disappear in the next two years, causing moderator Steve Bengston of PwC to jokingly call him “Doctor Doom”.

One of the most shocking statistics thrown out – 75 percent of all private equity deals that happened in 2008 went bankrupt. Bankruptcy courts are littered with private equity blunders, including household names Chrysler, Tribune Co, and Linens ‘n Things. Such high-profile blowups heightened private equity’s reputation as a group of fast-buck artists who are better at destroying companies than running them.

Rich Lawson of Huntsman Gay Global Capital, sits in a different spot altogether. Together with former 49ers quarterback Steve Young, Lawson and Huntsman are not burdened by a slate of overleveraged portfolio companies. They used the downturn to close a $1.1B fund and are in the enviable position of now picking and choosing where to invest that cash. Lawson said the opportunities they are seeing now and the quality of opportunities is incredible. Huntsman looks at companies in tech or outside that generate annual profits of at least $25M because they feel that these more mature companies offer better prospects for their investors. He also said they look for entrepreneurs that are willing to put some of their own “skin in the game.”

Rajeev Batra, Partner at Menlo-Park based Mayfield Fund, offered a few sage insights from the VC industry for entrepreneurs in the audience, saying that they are seeing better quality deals, with the recession fading or about to fade. Mayfield is primarily an early stage investor with select later stage activity in the U.S. Mayfield makes investments in more mature companies in India and primarily in non-tech related areas. In the US Mayfield looks to invest in Enterprise IT, Consumer Internet and Energy Technology.

Richard Garnick, CEO of The ConJoin Group, a hybrid between a VC and management consulting firm, offered some sobering predictions for venture backed companies – stop dreaming of early exits. ConJoin partners with VC/PE firms to help their underperforming portfolio companies (mid-stage investments) get back to profitability by transforming their business model. Garnick sees the recession as a green field for new deals for ConJoin. He pointed out that of the companies that were funded between 2000 and 2007, many of them will never get to raise another round.

Batra may have summed it up best when he said that other countries will never have the same spirit of entrepreneurship as the U.S. for one reason: In this country, failing is seen more as a battle scar, provided you learn your lesson. Entrepreneurs in Silicon Valley are willing to take risks and fail, then get back on their feet. Failure in other countries carries stigma that can’t be as easily shaken.

The audience left with a sobering vision of the future. But maybe our expectations needed some adjusting.