“It takes 5 years to build a company.” Those were the words imparted to me 16 years ago by the venture capitalist across the table during my first pitch. Of course what he meant by “build” was first check to exit; ideally Series A to IPO. For all the talk about how things are faster or cheaper or “the Internet changes everything” the startup model really hasn’t changed much. That’s why venture psychology sometimes puzzles me: the return on a new venture investment is determined by an exit three to five years away, yet the frequency and valuation of investment is determined by what is happening this week.
The credit crisis and economic slow down has eliminated IPOs and acquisitions this quarter.
And this has brought a significant decline in venture deals. Not only are fewer deals getting done, more of the money is shifting to later stage deals. I know that VCs need to prop up their winners and ensure they survive to an exit. But, that doesn’t explain the flight from good early deals that will not be ready for an exit until this business cycle has swung back up.
The other truism shared with me 16 years ago is that investors are motivated by fear and greed. You would think right now rather than retreating in fear, greed would kick in and the down turn would be used as an excuse to get lower valuations and VCs would concentrate on new early investments. When the market is stagnating and resources are readily available it is the time to start new companies, and now is the time for VCs to make early investments in those new companies.