These days we see an interesting phenomenon. While the climate for new businesses and new investments is looking better by the day and the recent economy down-turn is already ancient history, the Venture Capital (VC) industry is haunted by the ghosts of the past (once called “dot-com”).
The ‘New Economy’ - a Gold Rush
For those of you that weren’t even in college at the time, let me give you some background. Between the years 1997 and 2000 - the so-called ‘New Economy’ - hundreds of companies went public and the venture capitalists that financed those companies multiplied their investment within months, even weeks. This gold rush attracted more and more people, and new funds were created daily.
A Deep Dive - No RecoveryNow imagine you’re a venture capital firm and you raised a couple of million dollars at the peak of the market with the promise to turn it into much more money. Unfortunately, in early 2000 the market took a turn and stock prices dropped dramatically; I recall my investment in a giant telecom provider dropped 50-60% during a two-week vacation. Things were disastrous, people got fired, companies went bust -- and the ventures sat on a pile of cash and/or over-priced investments with no market to sell to. 
Investments Need TimeAt that time, it seemed that being a VC was all about the quick return but the business of a VC is actually much more complex. The whole process from raising the funds, finding deals and investing, helping companies to grow and turning the newly injected cash into revenues takes time. While some of the investments provide great returns fast, to close a whole fund and exit all of the investments - either with an IPO or a trade sale - can take up to ten years.Now, more than 10 years later, the last of those funds come to a close. While losses have been written off a long time ago, investors will still have a very close look at their returns and will gravitate towards those that have proven decent returns even in tough times.Less Investors with More Than Four DealsThe E&Y Venture Report shows the results of this development. A recently completed survey shows that about half of the investors in the funds have expressed to be “somewhat unsatisfied” or “not satisfied at all” with the returns. This was accompanied by a rapid consolidation in the VC market both from a funding perspective as well as from a deal flow perspective. Over the course of the last ten years, the number of investors that complete four or more deals a year have declined by 56% in the US, by 64% in Europe.
Pick Your Investor with the Long-Term in MindIf you’re looking to add a new investor to your business, make sure you include these findings in your process. Plan for the long run and make sure your investor has the experience and the track record to deal with even tough markets. Make sure your investor is really in the business of investing; only a quarter of the European investors close more than four deals a year, which means the others close less than 1 deal a quarter.Why does this matter? Isn’t cash what you’re looking for? Let me give you just two hints: funds & exit. If you continue to grow, you’re most likely to require additional funds to take the next steps. Which VC do you believe investors will back? Yes, the one that does all the deals. And after a great run and years of success you might be interested in selling your business. Which VC has the most experience, the best network? Yes, again, the one that does all the deals.Also of InterestFrom an entrepreneurial perspective you might be interested in some other statistics: the average investment round closes between about $3m (Europe) and $5m (US). Companies receiving funding either get acquired (within 5-7 years) at an average valuation between $20m (Europe) and $50m (US) or in some rare cases go public.The hottest place for investments remains the Silicon Valley. But even our home turf of NYC with slightly short of one billion dollars in investment is more than 50% larger than Germany. One number that supports our strategic decision to invest in Clean Tech as a focus area is the fact that 17% of the total investments have been made in this segment.Read more about in the 2010 E&Y Venture Report.
