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VCs are now risk averse

by on June 5, 2013

Does it seem harder to get funding today than it used to?  I know several of my clients are finding this to be true and I’ve talked to many CEOs and founders who feel the same.  I think it’s a combination of factors.  For starters, VCs haven’t forgotten the bust.  Combine that with a dragging economy that is setting stock market records, but still wary of tech company IPOs, and the effort to raise capital today can seem impossible.  I believe VCs are now generally risk averse.


How can this be when Insight Venture Partners just closed a $2.57 billion dollar fund, Roku just received $60 MM, on top of an earlier $80 MM round, to be the front end of your TV, and Videology, a Baltimore-based provider of online video advertising solutions, has also raised $60 million in Series D funding?  How can this be possible?

High Risk Ventures are Too Risky

According to Michael S. Malone, a well known technology writer, VCs today expect something pretty close to a “sure thing”, where the investment manages to combine strong return with no risk.  Where VCs used to invest in startups based on a business plan and a founder team, they now require a demonstration of product, a veteran executive team, and even an installed based of users/customers.  This philosophy extends to more established companies, too, not just startups.  Despite the round, VCs want to take less risk.

Billion dollar funds are at the top VCs

Yes, there are several VC firms with billion dollar funds.  But only the top VCs have those funds and as a result the best business plans are going to them, and they get the pick of the best.  Second-tier VCs, who don’t have billion dollar funds, get the rest.  But the second-tier VCs are also looking for that “sure thing”, which is even harder for them to find.

The inevitable effect is to push the VCs into a small number of mature deals with modest returns, in which they’re happy to invest large sums of money.  VCs, and their investors, are willing to take smaller returns as long as they don’t incur big losses.  While it is fairly easy to get $40 MM  or $60 MM for an established company with a small potential return these days, it is almost impossible to get $1 MM for a new startup no matter how big the upside might be.

No Tech IPO Market

The fact that there aren’t enough tech IPOs anymore really exacerbates the problem.  The VC model works best if there is a really big return in just a few years.  That could happen if the liquidity event was an IPO, as that event might produce huge returns.  While it has always been that most companies are acquired and few go public, the hope, the possibility of that big IPO, kept investors in the game and money flowing to smaller companies.  Now, with so few companies making it to an IPO, the big return hope is gone.  So now the investors are expecting that the exit will be an acquisition, which almost always happens at a fraction of the returns offered on an IPO.  This makes the VC’s even more conservative – why waste a million bucks each on a few startups that will never go public when you can throw big bucks at a handful of safe, mature companies with a moderate, highly likely return?

What is a CEO to do?

So as the CEO you’re going to have to do some serious budgeting.  While all small and midsize companies are supposed to run lean, these events mean you have to run super lean.  Outsource as much as possible, even business and corporate development.  Look for funding from strategic partners, consider taking a bank loan first, and work with strong individuals that can help by working their own networks.

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From → Venture Capital

  1. Margaret Levy permalink

    Ironic, isn’t it. Takes the “venture” out of venture capital. More like solid or secure capital.

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