SF Venture

Venture Trends Positive With Activity Steady In Q2

According to DowJones, there were 524 equity financing rounds raising $5.4 billion for U.S. venture-backed companies in the second quarter of 2005.  This was down a bit from last year’s second quarter, but this was the highest level in the last four quarters.  Within these numbers, there was an increase in later staged deals, which accounted for 210 deals and almost $3 billion of the total.  Download vc_spending_second_quarter.pdf

I was quoted in an article accompanying the release of this information, suggesting that the reason for the relative slowdown in funding for earlier stage deals is a healthy shift to more capital efficient start-ups.  It’s good to see initial dollars invested per company declining.  It allows for profitable venture investments with exits from M&A, which remains more likely.  Average deal prices for the second quarter approached $70 million. 

"If you are getting $70 million out, you want to make sure you're only putting in $20 million to $30 million," Keith E. Benjamin, a managing director with Levensohn Venture Partners, said.

The relatively stable pace of funding activity this far in 2005 is encouraging.  After the refresh of capital for new funds raised since last year, there had been some speculation that there would be a rush to spend money.  This has clearly not happened.  I’d like to believe that this reflects lessons learned.  I think it’s also an acknowledgement that there are fewer new technologies areas to attract new investment.  While there may be fewer deals, I see a higher quality of capital efficient companies raising money to develop viable new markets. 

I’d expect to see some growth in aggregate venture investment through 2006, as the venture community gets back to a spending pattern that matches exit opportunities. 

Hiking the John Muir Trail

I joined a good friend to spend 9 days hiking the High Sierra segment of the John Muir Trail (JMT).  We covered 135 miles of the JMT, which runs 211 miles from Yosemite Valley to Mt. Whitney.  I've attached a slide show highlighting the trip, which you can Download JohnMuirTrail.ppt .  I’d encourage everybody to consider this trek through some of the most spectacular and still unspoiled parts of our country.  It was one of the toughest and rewarding challenges I’ve undertaken.  I plan to repeat the trip when my children are old enough to join me. 

After a decade of greed, we’re living in a decade of fear…

The 90s were driven by greed as we chased technology stocks to temporary wealth.  The mood was good while it lasted.  Aggressive investing was addictive. 

The crash shocked the investment community.  If that wasn’t bad enough, 9/11 caused us to be concerned for our personal safety.  This sustained period of panic and pessimism has created the equivalent of a low-grade fever that infects our attitudes and actions. 

While yesterday the NASDAQ Index just reached a 4-year high, it’s still 50% below its peak in March 2000. 

Today, any risk feels bad.  Individuals run quickly from stocks that show volatility.  Investors have generally moved have far away from risk as possible.  Venture capitalists are still taking risks, but returns continue to suffer a shortage of rich exits, with some improved liquidity from M&A.  Hedge funds and buyout funds are attracting massive amounts of money with the promise of beating mediocre returns for taking long positions in public equities.  Real estate looks so safe that it feels like another bubble. 

Consumers are borrowing heavily and spending on new toys from iPods to retro hot rod Mustangs.  This may provide some comfort in contrast with disturbing world news and slower career progress at home. 

Corporations are still shy of spending on new technologies.  Fear continues to drive purchases of security tools to deal with persistent threats.  For technology designed to boost productivity, CIOs are less likely to start big projects and more likely to allow individual professionals and/or departments to buy hosted applications. 

The London bombs are yet another reminder of the ongoing battle between worldviews.  We are also being forced to take sides on domestic issues.  Last year’s election started the showdown between red/blue, conservative/liberal, and the religious right/left.   This week’s forum is the Supreme Court.  The scary part of these debates is that there does not seem to be room for moderation.  Great leaders in the past have brought the country together.  We appear to be dividing ourselves from the rest of the world and each other. 

With these serious distractions, no wonder it’s difficult to get excited about the next new technology.  Fortunately, the web is working again with a second wave of economic activity with more personalized commerce.  The rapid rate of blog creation is also providing a healthy outlet.

While the U.S. may be suffering through a decade of fear, emerging markets around China are starting to enjoy a decade of greed with the help of positive demographic and political trends.  This is attracting more U.S. VCs to head east for this cycle.    

Can the next decade provide an easier path for life, liberty and the pursuit of happiness back home?  I don’t yet see the catalysts to support another decade of greed.  My nature remains to be naturally optimistic, but I’ve been training myself to keep expectations low enough to appreciate whatever happens.