Venture Capital in Crisis
We have the good fortune to have Brian Caulfield on the board at PutPlace.com. At a board meeting yesterday Brian gave a chilling analysis of the state of VC across the globe. Afterwards he sent me a bunch of links supporting his analysis.
In short whatever problems you have raising money for your startup, the VCs are seeing those problems double.
VC’s raise money from what are called Limited Partners (LPs). When a VC announces the closure of a round what they have actually got is a commitment from the LPs to provide funds to support investments over the 10 year lifetime of a typical VC fund.
As the VC makes investments they make cash calls on the LPs to support those investments (Enterprise Ireland’s 175m is still sitting in a government account somewhere, even though most of it has been committed) so throughout the lifetime of a fund the LPs continue to feed cash into the fund.
Most LPs are in fact pension funds and those funds are experiencing the same smack upside the head that the rest of the financial system is still reeling from. So they have asset pools that have halved in value and as a result they have no liquidity to meet the cash calls of the VCs they have invested in.
This is resulting in a VC double whammy (and by extension companies looking for VC money). The first problem is that LPs are writing off their existing investments in VCs and trying to withdraw from any future commitments to the fund. Legal issues abound here and we can potentially expect to see some LPs sued for this behaviour.
The second problem is that LPs who are honouring their commitments are approaching VCs en mass and saying “don’t make any investments as we won’t be able to meet your cash calls for the next while”.
The net effect of both these issues is the same, VC money is drying up faster than Sahara rain drops.
So, raise as much as you can, at whatever price you can, plan to have at least 12 months cash in the bank and get to break even ASAP.