Venture capital returns over the past decade deserve two thumbs down. $100 invested in a venture capital fund in 2000 is worth slightly more than $98 today, once you factor in fees and expenses, according to research by Boston-based investment consulting firm Cambridge Associates. With such returns, why not buy into a lemonade stand? Not surprisingly, fundraising activity has dropped precipitously to $13.7 billion in 2009, down 66 percent from 2007, when the financial crisis began.
Venture capitalists are taking meetings — to maintain the mystique. But things are far from business as usual. Some funds are looking only inward, dedicating capital to support a struggling portfolio. Others that are nearing the end of their life cycles are winding down altogether. The industry has proven that it can no longer support an endless stream of me-too investors and entrepreneurs.
With a longer path to liquidity and lower valuations on exits, entrepreneurs seeking early-stage equity investment need to prepare for a different set of investor expectations.
Jennifer Sargent and Gregory Ellwood, founders of Los Angeles-based entertainment news site HitFix, beat the odds by completing a $980,000 seed round right after the collapse of Lehman Brothers. Anticipating a tough climate for follow-on funding, they took drastic steps to reduce spending and nonetheless managed to acquire 500,000 unique users, a key milestone. But in October 2009, as Sargent and Ellwood started pitching investors for a $1.5 million institutional round, they made a disturbing discovery: The VCs that they had sacrificed to impress were no longer investing actively.
That’s because investors, even brand-name players, can no longer raise as much cash. With midsized funds diminishing, new money flowing into the industry resembles a barbell, with blue chip Sand Hill Road funds at one end, and smaller, laser-focused funds on the other.
Smaller Checks Chase Smaller Ventures
It takes…