VC Perspectives

A few week backs I spent some time in Boston and New York with fellow Nordic VC colleagues meeting US investors, VCs, entrepreneurs and academia. It as a great week and here are some thoughts and remarks from the trip.

The state of VC

In general, the views on VC is pretty pessimistic. As in Europe, US investors and VCs are debating the poor returns from VC during the last 10 years: on average, VC returns have been zero or worse.

There are several explanations to the situation, the most common one being that there’s just been too much money injected into the VC market. Many VC firms grew in fund size and many average VC firms received lots of capital as well (the total amount of yearly VC investing doubled or tripled from mid-90s to mid-00), while at the same time the IPO-market has been much worse compared to the boom years.

Most agree on that what will happen is a healthy readjustment with fewer, smaller funds & teams and total VC investment levels down to what they used to be before the millennium.

There’s also self-criticism on behalf of how the VCs have been investing, throwing money at companies to grow (too quickly) and get a quick exit. Now, the VCs are now even talking about finding capital efficient companies.

Capital efficiency

Maybe not something you would expect to hear from US VCs; it is often said that European VCs are not providing enough capital for the companies early enough but there’s definitely much more focus on investing in capital efficient companies. Or as Axel Bichara at Atlas Ventures put it: Prove-Build-Scale.

The LP (VC investor) perspective

The classic VC approach is to have a few home runs providing the returns and cover for the bad ones. However, this approach has meant high volatility (how much the returns fluctuate) with a few good exits creating almost all positive returns. So when the exits weren’t as many and as big as before and the failures increased, it became difficult to get consistent, good returns. From an investor perspective, this creates a problem because they want consistent, good returns. As a result, LPs are more and more appreciating stable returns and fewer failures which few VC firms have provided, alas LPs’ appetite for VC has gone down.

Dare to invest early

I was surprised to find that most of the VC firms we met (large, top-tier funds) still are doing early-stage investments, even seed investments. The problem is normally that when you have a billion dollar fund, it is hard to justify small, early investments because of time and resource aspects - it is more efficient to invest large pools of money at the same time. So it was very encouraging that the VCs are still regarding it important to continue to do early deals as well.

Terms

A typical A-round is 1x participating liquidation preference where the VC invests x dollars on x pre-money valuation. This means that the VC owns 50% after the investment, the founders 30% and 20% is usually allocated for options. This is quite different to the Nordics where VCs typically would own less after the first financing round and where much lower amounts of shares are allocated to options (partly due to tax issues of course).

Here’s a good article about what’s wrong with the venture capital.

The Seedcamp season is in full swing with events happening around the world. For the Nordics, this year’s event is held in Copenhagen May 27.

One of the mentors at the New York event was Jonathan Klein, co-founder of Getty Images who presented 10 tips on how to build a great business. And one of the participants was Emi Gal, CEO of Brainient, who wrote about Jonathan’s presentation here.

There are plenty of very good advise from Jonathan; from a Nordic perspective I would particularly like to emphasize point 3 & 9 as these are oftentimes much more important than one might think and really critical when scaling up an organization.

Here’s the list as noted by Emi:

1. Raise more money than you think you need. If you’re on to build a large business, dilution doesn’t matter anyway. You’re in the business of minimizing risk.

2. Cash is the only thing that matters. That should be your focus. Create an automated, scalable business model that will generate cash.

3. Invest in your company’s culture. It works as a filter for making small, easy or complex and tough decisions.

4. The two most important things in your company are: your employees and your customers.

5. Be honest, transparent & realistic. Especially with yourself.

6. Decide fast. It’s better to be wrong and fix it than sit around for 3 months and miss on opportunities.

7. Wrong decisions are OK. As long as you’re wrong really fast!

8. Focus, focus, focus. Say NO to stuff. Constantly.

9. LEAD. People are crying out for leadership. Know where you’re going, and they’ll follow. You can find Jonathan’s leadership principles here.

10. Have fun every day. “Sometimes it’s even black humor“, he said.

If you’re interesting in getting some data points on European and US venture capital for 2009, it could be a good idea to attend FutureMoney in Helsinki on February 18. The event will be chaired by Mikko Suonenlahti from Growth Management Ltd.

VCs usually use various forms of preference shares when investing. As an entrepreneur, it is important to know what this means since it will affect things such as how proceeds from an exit will be distributed.

Through Fred Wilson, I found this good link to a description of how VC terms affect the proceed distribution in various cases. Here it is.