Innovation Blog

Post-Crisis VC Money:  How to Find It?

By Shlomo Maital

       Writing in Business Week’s “small business finance” department this week,   Monica Mehta provides some bleak numbers for returns on VC investments — something many of us have suspected for a long while.   According to the Boston consulting firm Cambridge Associates,  $100 invested in a VC fund in  the year 2000 is worth today a bit more than — $98, a rate of return of minus 2 per cent.  Total VC fundraising dived in 2009, to a miniscule $13.7 b., in the U.S., down two thirds from pre-crisis 2007.

    What can be done by startup hopefuls seeking to raise VC funding?

   She cites a case study on HitFix, an LA-based entertainment news website.   The two founders discovered that mid-sized VC funds have greatly diminished, leaving many small laser-focused funds that specialize, on one end, and huge blue-chip funds like Sand Hill Road at the other.  They managed to raise a $980,000 seed round right after Lehman Brothers collapsed, then imposed drastic cost cutting and with minimum funds reached 500,000 users of their website.    Later, they turned to an angel network, Golden Seeds, for Series A funding.   After lining up an anchor investor, smaller VC funds were more willing to invest.    They found that investors require HitFix to reach profitability with Series A funding alone.  Treat Series A as if it were your last, they found.    There will be no quick IPO, HitFix discovered.  Experts coach them to look instead for a strategic sale.

    I urge all startup hopefuls to reconsider and rethink their business model.  Instead, try to bootstrap.  Invent a product or service that will generate quick cash flow.  It could even be a day job.   Use your evenings to write code or build a prototype. It will take much longer — but you will retain control, and will not face VC’s who give you wrongheaded orders, and as Directors insist you carry them out.