Stop shovelling coal and start looking for diamonds

by Niki Panourgias

In a week that has seen the demise of the Industry Standard, once the indispensable read of the internet economy, and the death throws of Beenz, the online currency that was going to be one of the building blocks of this ‘new’ economy, optimism is likely to be in even shorter supply than usual.

As if that was not enough, the latest PwC and Venture One MoneyTree survey of venture capital investment in the US shows a further 21% decline in such investment in the second quarter of 2001 to US$8.2bn on top of a fall of 41% in the first quarter of the year. If these were GDP figures, two consecutive quarters of falling output would count as a recession. So, the US venture capital sector is in recession – it is official – and the lion’s share of the fall has come from the ITC sector, especially fiberoptics and photonics.

The deceleration of the decline from 41% in Q1 to 21% in Q2 is one crumb of comfort in the headline figures, but the survey also shows an almost complete collapse in such investment from sources other than venture capital firms such as business angels and corporate venturing. This will come as a nasty surprise for all those in Europe who saw corporate venturing as a panacea for the wows of the private equity investment sector. Of course, one should not adopt a mechanistic approach that sees everything that happens in the US hitting European shores after a month or two. In the UK, for example, the government through its Budget has provided some pretty generous incentives to encourage companies into corporate venturing It is also providing some pretty good tax incentives to encourage overall investment in early-stage companies and with interest rates still pointing downwards, there should be plenty of investor interest still. The same is true across the channel, with pretty much all EU governments from the Baltic to the Mediterranean providing similar incentives, regardless of political persuasion. Under the circumstances , the collapse in private equity deals on this side of the Atlantic and the degree of pessimism – bordering on the self-destructive – one hears about appears overdone, despite the undeniable difficulty in exiting through the public markets.

So, is there a way out of this self-fulfilling cycle of despair? Most people in the digital economy, whether investors, entrepreneurs, consultants, or in support services, have persuaded themselves that there is little that can be done apart from battening down the hatches and waiting for the storm to pass. There are some, however, who are using the current situation as an opportunity to step back a little and take a good hard look at the smouldering landscape but then look for solutions rather than throw their hands up in despair. Lucy Marcus, CEO of Marcus Venture Consulting who advises both venture capital funds and limited partners, while in no way denying the very real difficulties of the early stage technology investment sector, has a simple explanation for the extent and speed with which sentiment turned from exuberance to despondency. “Everyone was like excited kids at the playground, running around ‘till they drop with tiredness,” she explains. “The needed mum to come along and tell them to go to bed before they reached that stage.”

Of course, Marcus gives many other specific reasons for particular cases, but she clearly believes that some time for stocktaking after the frenzy of the last few years is vital in finding a solution to the current malaise and has a few of her own ideas about what these solutions are likely to be.

Marcus questions efforts and incentives in Europe to recreate Silicon Valleys on this side of the Atlantic, but sees the present lull as a good opportunity for those already in the early stage technology investment business to go back to basics and re-think their strategies. With financial information whizzing around the world at lightning speed she believes that funds and partners can no longer rely on the relative obscurity of the private equity world to insulate themselves from fast moving market pressures. Just as in any other market, they will also need very clear and distinguishing USPs to rise above the crowd and attract funding. In effect, the VCs need to assess themselves in the same way as they would assess companies coming to them for funding. Marcus also questions the generic badge of technology investment and is urging funds and partners to specialise much more on specific sub-sectors but cover the entire value chain, arguing that the generalist approach wastes valuable know-how built up during specific projects. Above all, however, she thinks that early-stage investors need to look at the quality and not just the volume of their deal flow, without resorting to the typical cop-out that nine out of ten investments fail and the one that makes it will more than make up for the others.

No one is under any illusions that turning around the prevailing sentiment towards technology investment will be anything but a long slog. The solutions above are not ones that will be implemented at the flick of a switch. For a start, there will have to be substantial and time consuming pruning and rearranging of portfolios, if funds and VCs decide to become more niche-conscious and coherent. Above all, however, there will have to be a change in attitudes and a shift away from ingrained habits and methods, something that always takes a long time even for individuals, let alone organisations. The MoneyTree survey, however, shows an increase in later round funding in the States, indicating that VCs there are now putting more effort into developing existing ventures and giving them more time as they adopt a ‘less is more’ approach to investment.

As usual, there is no panacea, but a start needs to be made in trying to attract investor interest back to the sector through better and more mature offerings, but getting busy and having even a few clear objectives is vital psychologically in order to overcoming the debilitating despondency and fatalism that is permeating the whole sector.

Reprinted from http://www.netimperative.com/redirect.asp?i=56624

Date

17 August 2001

Organisation

NetImperative

In the Press Archive