Pop Goes the (Venture) Weasel…
So the first quarter venture funding data were just released and the news for entrepreneurs was decidedly bad. It is pretty clear the party for “easy money”—particularly for cleantech companies–is emphatically over. Venture-backed companies raised only $3.9 billion in Q109, which is basically half what they raised this time a year ago. New England companies raised only $375 million. There were slightly fewer than 500 deals nationally this past quarter–and some analysts calculated that almost two-thirds of those investments were “insider-only” financings. Therefore, the rate of new company formation arguably has fallen dramatically. Anecdotally, not much appears to have changed in this current quarter, as the environment continues to be reasonably hostile to entrepreneurs and VCs alike.
Leading the downward spiral were consumer services and cleantech deals, down 70 percent and 59 percent, respectively, from the prior quarter. Right on their heels were information technology and business services investments (down 52 percent and 50). Perhaps somewhat surprisingly, healthcare was down a more modest 34 percent on a dollars invested basis; this is surprising because there are nearly 125 public biotech companies with less than a year of cash, and that does not even account for the many multiple hundreds of private biotech companies presumably still seeking capital—which, one would have thought, would have scared away investors.
But what should we have expected given the calamitous fall and winter of 2008? Clearly there was going to be an “echo boom” from the meltdown that was going to wash over the venture capital market. And these corrections are going to continue to be painful. One should expect unprecedented company closures over the next 12 months—particularly in the supply-side cleantech sector. The legacy company burn rates, lack of follow-on equity and debt capital, undefined business models, $45 barrel oil, and significant technical risks weigh heavily on many cleantech businesses now.
So where does that leave the New England marketplace? Amongst the rubble I see some good news. In difficult periods the venture marketplace tends to contract back to regions of historic strength. New England has always been a distant but steady number two to Silicon Valley. Over the last year this region has attracted between 10-15 percent of all venture capital (the Valley was between 35-40 percent). Of particular note, though, is that many venture firms in this region (Charles River Ventures, Atlas Venture, New Atlantic Ventures, .406 Ventures, RockPort Capital Partners, just to name a few) have been able to raise new funds—admittedly smaller than prior funds—which is clearly not the case for firms in secondary markets.
New England has a very diverse set of venture funds. The New England Venture Capital Association (of which I am the current Chairman) boasts 137 member firms, of which approximately 50 have made more than three new investments in the last year. This is a broad and diverse investor base which mirrors the many industries represented in this region, and it should serve us well in the days ahead.