Thursday, March 20, 2008

VC Industry to Shift Focus?

These are tough days for venture capitalists - and tech entrepreneurs. For every YouTube and Facebook, there a hundred other VC funded businesses that are just limping along. Heck, some might even be skipping along (generating revenue, perhaps even profitable) but it doesn't much matter. The is precious little 'liquidity' - the life blood of a heathy start up environment. The IPO window is almost shut for all but the most impressive companies. Wall Street wants to see revenues of somewhere in the $100 million range, and profitablity, to seriously consider a company for a pubic offering. Even then, with the dramatic downturn in tech valuations, there are few buyers for these nascent tech company shares. Certain industries, telecom, semiconductors and enterprise software are particularly difficult to attract Wall Street interest. There is a sense in these sectors that the best days are passed. While not true, Wall Street bias are hard to overcome.

Many investors - and founders - have been in their companies for 6, 7, even 8+ years. They are finding that it is not enough to build a solid revenue generating company. And those of us in the start up world know how terrifically difficult that is. No, revenues and profits are not enough. The public markets must also be in an accomodating mood. With tech valuations at signifcantly depressed levels, even the M&A market is in a slump. Acquirors like to use their generous market caps to buy smaller companies. When their market caps shrink, so does their acquisition currency - and their nerve.

So where will this take us? One effect of the long tech slump (going on 8 years) is a greater openness on the part of traditional tech VCs to consider investments in alternative industries. Clean tech is clearly one such example. But there are others. VCs are now investing in such non tech spaces as store front retail, apparel and even consumer products. Where this winds up is anyones guess. But I believe a growing percentage of venture dollars will find their way to non traditional industries. Should this trend gain traction, Silicon Valley itself may become less relevant over time. To be sure, it will likely remain the largest base of VC investment. It just won't dominate as it historically has. That is not necessarily a bad thing. Southern California entrepreneurship has a lot more to offer than just technology centric businesses.

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