TitleSo what of the recession and the effect on the tech sector when fund raising?

Entry
A lot of people have been asking me what impact the global financial crisis has on the business of fund raising. I see and have lots of CEOs approach me about roll up deals and M&A as they struggle with today's econimic climate. Trutap lay off 90% of their workforce, QIK shed 10% of their staff- Ford and GM get bailed out ( now is that fair when young tech businesses go to the wall? My view on funding raising in the current climate is really quite simple- don't do it unless you really need to or have spotted a great opportuntity. If you are currently raising a venture capital or growth capital fund, the paralysis of investors worldwide means slower decision-making and a longer fund-raising cycle. You may even lose some previously committed investors who are now conserving cash to cover losses in other asset classes. If you have recently raised a round then you are in good shape. As banks, non-bank companies and consumers are rapidly finding out, when credit is tight cash is king. As the IPO window remains shut for longer and M&A activity slows, there will be fewer buyers for companies and acquisition prices will be depressed. We already saw throughout 2008 a flight to quality: companies with strong topline growth and high profitability are still being acquired and achieving good valuations. The companies best able to survive this environment are those with strong 'operating leverage' -- that's VC-speak for high gross margins. High margins reduce the effect of slower revenue growth and give companies more flexibility to reduce their cost structure as the market slows. For investors, the key is to be able to wait for the right time to sell a company. This means both the internal timing (strong operations, good growth, a clean balance sheet) and external timing (market interest). Companies that are profitable or close to profitability have a huge advantage in this market. The second most affected category will be early-stage VC. Most VC-backed companies are loss-making and were valued at the time of investment on the basis of aggressive growth forecasts, or expected strategic value on exit, or both. Slower growth and a longer-time-to-exit means they will need to raise more capital, probably on worse terms. This increases the equity cost of their investors and extends their investment horizon, depressing rates of return. Already we are seeing VC firms increase the follow-on reserves for existing portfolio companies, which will mean less capital available for new investments. In the last downturn, many shifted their focus to later-stage investments, leading to a funding drought for pre-revenue companies. In the face of every recession there are opportunities and the savvy investor will prevail.

So what of the recession and the effect on the tech sector when fund raising?

Dec 08, 2008

A lot of people have been asking me what impact the global financial crisis has on the business of fund raising.
I see and have lots of CEOs approach me about roll up deals and M&A as they struggle with today's econimic climate. Trutap lay off 90% of their workforce, QIK shed 10% of their staff- Ford and GM get bailed out ( now is that fair when young tech businesses go to the wall?

My view on funding raising in the current climate is really quite simple- don't do it unless you really need to or have spotted a great opportuntity.

If you are currently raising a venture capital or growth capital fund, the paralysis of investors worldwide means slower decision-making and a longer fund-raising cycle. You may even lose some previously committed investors who are now conserving cash to cover losses in other asset classes. If you have recently raised a round then you are in good shape. As banks, non-bank companies and consumers are rapidly finding out, when credit is tight cash is king.

As the IPO window remains shut for longer and M&A activity slows, there will be fewer buyers for companies and acquisition prices will be depressed. We already saw throughout 2008 a flight to quality: companies with strong topline growth and high profitability are still being acquired and achieving good valuations. The companies best able to survive this environment are those with strong 'operating leverage' -- that's VC-speak for high gross margins. High margins reduce the effect of slower revenue growth and give companies more flexibility to reduce their cost structure as the market slows.

For investors, the key is to be able to wait for the right time to sell a company. This means both the internal timing (strong operations, good growth, a clean balance sheet) and external timing (market interest). Companies that are profitable or close to profitability have a huge advantage in this market.

The second most affected category will be early-stage VC. Most VC-backed companies are loss-making and were valued at the time of investment on the basis of aggressive growth forecasts, or expected strategic value on exit, or both. Slower growth and a longer-time-to-exit means they will need to raise more capital, probably on worse terms. This increases the equity cost of their investors and extends their investment horizon, depressing rates of return.

Already we are seeing VC firms increase the follow-on reserves for existing portfolio companies, which will mean less capital available for new investments. In the last downturn, many shifted their focus to later-stage investments, leading to a funding drought for pre-revenue companies.

In the face of every recession there are opportunities and the savvy investor will prevail.