By John C. Yates, Esq.
Morris, Manning & Martin, LLP
ATLANTA – I recently visited with more than a dozen venture capital firms in Boston. In reviewing businesses with them, I discerned several critical issues and trends for entrepreneurs looking for money in Q2 of 2009.
In summary, we are moving toward a “new reality” in raising capital for entrepreneurial companies. While the road is bumpy, some deals are getting funded – it’s just taking longer and the numbers are still small.
The good news
The good news is that we believe better times are coming. In almost every meeting with VCs in Boston, the same positive indicators surfaced -
• The venture fund has available cash to invest now.
• Everyone agreed that Q1 was a disaster, but no one expects the rest of the year to be as dismal for VC investing.
• Funds are interested in finding new deals and actively looking for them (I was encouraged by the interest of Boston VCs in Southeastern companies).
Top issues
Based on my recent VC meetings, here are the Top Issues in VC Investing for Entrepreneurs in May 2009:
1. Valuation expectations are still far apart – Venture funds are interested in investing in solid companies, but at a valuation that may be untenable to the entrepreneur. There were some indications that this valuation gap is narrowing and may lead to more deal flow soon.
2. Early stage opportunities are emerging – Serial entrepreneurs and “academic” entrepreneurs are surfacing to test the waters for capital. Several Boston VCs mentioned their current interest in early stage startups out of MIT and other universities (and we have seen a similar emergence in Southeastern universities).
3. IPOs may be back as an exit strategy – In the past few weeks, at least two technology companies have filed for an IPO, and the VCs seem to believe both will actually complete the public offering process (before they are acquired). This is good news since VCs need an exit path for their investments in addition to an outright sale.
4. SaaS is still hot – Companies with a software-as-a-service (SaaS) model, recurring revenue and a customer base are of great interest to most VCs. On the other hand, valuations may be too far apart for a deal to be made now.
5. Demand side energy/clean tech companies are interesting – Most of the VCs have an ongoing interest in the demand side of energy/clean tech — that is, products and services that regulate, monitor, or improve the efficiency of supply side technologies. These companies include smart metering, energy management and backup, and carbon neutral and trading solutions.
6. Supply side energy solutions are more challenging – There are a few large venture funds making the big plays for new technologies in wind, solar, and batteries. These are often big bets requiring significant capital and long business cycles (one Boston VC firm compared them to drug discovery companies — except with more competition in the energy area).
7. Healthcare IT service businesses are of great interest — The interest generally centers around the continuing complexity of the healthcare supply chain, the inefficiencies of the system, and the need for solutions at all stages. Almost all of the Boston VCs had an interest in this area and expected the healthcare regulatory changes to spur additional opportunities.
8. Management talent will drive new deals – The experienced VCs are very interested in meeting seasoned executives who have been successful in past ventures. The pool of talent is greater now than every before.
This column is presented for educational and informational purposes and is not intended to constitute legal advice.
John Yates is the Chair of the Technology Group at Morris, Manning & Martin, LLP, with offices in Atlanta, RTP, Washington, D.C., and Beijing, China.
Southeast Venture Conference, February 29 – March 1, 2012 at the Ritz Carlton in Tysons Corner, VA – Where Smart Money Meets Smart People.
www.seventure.org
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