Even as today’s economy puts the squeeze on the venture capital market, technology firms should take heart. VCs are still looking to distribute their money to firms with the right mix of qualifications.
Tops on that list are emerging companies with a focus on areas such as clean technology and cloud computing, plus capital efficient start-ups such as software as a service firms, says Mark Jensen, national managing partner of Deloitte LLP’s Venture Capital Services and author of a report released jointly this month by Deloitte Consulting and the National Venture Capital Association.
The report examined results of a survey conducted among 700 venture capital firms worldwide. Respondents voted overwhelmingly that their most hopeful sights are set on companies with fresh ideas revolving around clean technology.
“That’s certainly borne out in the marketplace,” Jensen says. “Everything that used to be nanotech is clean tech today, so we’ve kind of moved in that direction fairly rapidly.”
Though financial challenges have cooled the VC market, many individual venture capitalists remain upbeat. The report showed that when asked whether it was a good time or a bad time to invest, the vast majority of firms reported that it was either a good or terrific time to invest.
In addition to clean technology companies, Jensen believes that companies involved in innovating within the cloud are in a good position to pick up money from VC funds.
“I personally believe that it’s more nascent than people think it is,” he says.
Also in a good spot to work with VCs are companies looking to roll out software as a service.
“They’re very attractive to venture capitalists because they’re more capital efficient,” Jensen says. “The venture community right now is they’re very interested in capital efficient investments. So that’s a big area that were watching that have a lot of emerging companies”
With the market for commercial paper tightened up and traditional lending officers giving the cold shoulder by default, most technology firms are finding it an uphill struggle to fund their next generation innovations. While opportunities can be found within the limited areas he mentioned, Jensen believes that many IT companies will find it harder to gain immediate relief from the VCs.
In his investigation of the survey results, Jensen found that the venture community is struggling to account for the rapid deterioration of the economy’s financial moorings. By nature a venture capitalist is an optimistic creature, but even the most optimistic of them admit that the lack of liquidity is hurting the VC industry.
“One of the biggest issues facing the industry today is the overall liquidity issues that we’re seeing in the financial markets; venture capital is not immune to what is currently going on in our financial systems,” Jensen says. “Some of the limited partners have tried to sell off certain private investments and it’s hard to raise cash. So that I think is causing the concern on the venture capitalists mind that some of the traditional limited partners are not going to be interested in investing in the future.”
Jensen says that this hesitation by VC’s limited partners is triggered by two main concerns. Number one is the overall liquidity issue. And number two is a lack of exits from their investments.
“The lack of IPOs, plust the fact that mergers and acquisitions right now have been fairly slow are a factor,” Jensen says. “The valuations are down, so they’re not interested in being acquired and the public companies that typically would do these acquisitions, their stocks are down, so they’re not really anxious to do a lot right now either. That really has caused what i would call a logjam in the system.”
Numbers released yesterday by the NVCA and Thomson Reuters back up Jensen’s assessments. According to the NVCA, exit activity fell short of historical norms during the second quarter of 2009.
“The fact that several venture-backed companies successfully entered the public markets
and performed well is encouraging,” Mark Heesen, president of NVCA said in a statement. “However, we remain concerned about the extremely thin pipeline of companies in registration as it indicates that it will be some time before we can even be in a position to return to healthy IPO activity levels.”
This so-called logjam is putting many firms in a pickle, diminishing their ability to reinvest in other new companies, Jensen says. It is also hurting the ability of already funded companies to continue to raise capital outside of the VC community.
“I hink what we’re seeing is what I would call a funding gap, where companies used to be able to go public, and continue their evolution using public capital or capital raised in the public marketplace. They still need to look at private sources and those private sources really aren’t’ there,” Jensen says, explaining that the gap tends to leave companies in the $100 million to $250 million revenue run rates in the cold.
Technology companies are particularly hit hard by this gap due to the relative maturity of the IT marketplace. The IT environment has evolved greatly over the past decade, with much of today’s innovation being fueled by companies with five to seven years of experience. While there certainly are venture firms looking for ways to help these businesses—such as Sequoia with its late stage investment funds—IT companies have reason to temper their expectations.
“That’s the beginning of filling that gap,” Jensen says, “but it’s not fully there.”