Northwest VCs See Existential Threat, and a Change in the Entrepreneurial Mindset

7/22/09Follow @xconomy

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and most money went to follow-on deals, Dale says. But the real part that keeps the VCs up at night, is still that they lack much realistic hope for an “exit.” The market for initial public offerings still hasn’t perked up, and few big companies have been willing to pay much to take over small, innovative startups. A year ago, VCs had some hope that hedge funds or larger private equity players might swoop in and create demand to buy companies at a pre-IPO stage, providing returns on their investments, but that idea has fizzled now that those asset classes are fretting over the prospect of increased regulation from Washington DC. There really aren’t many places a VC can turn to make a buck, from the sound of it.

“The real question is how are we as venture firms going to get returns for our investors,” Dale says. “It’s a critical issue for all of us. If we don’t generate returns for our limited partner investors, it’s tough to justify the asset class.”

So VC funds are carefully watching their cash balances, trying to wring maximum bang out of the bucks they have left, knowing full well that they might have a hard time raising their next fund. Edgy as the feeling may be, the mood among VC’s seems to be better now than it was in late 2008 and the first couple months of this year, Madrona’s Gottesman says.

“There was a time then, I don’t care which sector of the financial industry you were working in, you had to wonder if the sky was falling on the overall economy,” Gottesman says. “But the sky hasn’t fallen.”

OK, so what are the VCs doing to adapt? They’re doing what they always do—watching trends in innovation, looking for big moneymaking opportunities. And there are still innovative things to capitalize on. The shift toward cloud computing, in which businesses rent low-cost, high-powered remote servers to do Internet business, instead of paying for equipment themselves, represents a “fundamental change” in how companies can make an impact with less capital, Gottesman says. Another seismic shift is happening with social networking, in which savvy companies are using Twitter and Facebook and other sites to better engage with customers and build their brands.

Before I could even ask the obvious follow-up—about how those companies don’t yet make money—he beat me to the punch. “The thing that still keeps me up at night are the exit markets,” Gottesman says. “We have not had a strong IPO market for a very long time. The M&A market is still soft too,” he says.

So this is forcing VCs to do more than the usual amount of penny-counting … Next Page »

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