Yesterday I moderated a panel on the subject of the venture investment climate in 2009. The panelists were Axel Bichara of Atlas Venture and Austin Westerling of Charles River Ventures. The big picture take away from this event was that the investment climate is not as bad as advertised in the press.  In each case, Atlas and CRV have made a number of investments in the last year and continue to be actively looking for new investments. If I can generalize, their advice was (1) be prepared for a thorough diligence and, perhaps, a longer than normal process and (2) be realistic about valuations.

Axel gave some advice on how not to get funded. Here are his five bullet points on pitches that wont get you funded:

• We have five beta customers and want to raise $15M to scale the business
• This is a great fit for XXX [name a large company buyer]. They will have to buy us next year.
• Many of our $1M+ customers pay 12-15% maintenance per year.
• We are a software startup. The $10M we want to raise will last about 15 months.
• Our product is a great long term investment for our customers.

Austin noted that in the current climate there is a bell curve for companies from the early stage to the late stage and that it is easier for companies at each end of the curve to get funded than for those in the middle. If I understood Austin right, this is, at least in part, a function of the uncertainty in the market for IPO and M&A exits. Separately, he also noted that CRV has a high degree of interest in the wireless space, among others.

Someone from the audience asked if onerous terms such as multiple X preferences and full ratchet provisions were likely to start appearing. From my vantage point there was consensus among the panel that there might be a trade off between onerous terms and valuation but that as between the two, a company is better off with a “realistic” valuation than with these kinds of terms. The primary reasons are that these terms are likely to have an adverse effect on the entrepreneur’s return (i.e. valuation by another name) and they are likely to inspire the next round investors to ask for the same. 

When asked if the limited partner investors in their funds were balking at capital calls, the response from both Axel and Austin was “no.” Axel pointed out that, compared to LBO funds, the amounts of money that venture LPs are being call to pay is very small and that they are not called until significant time and work has gone into the development of an opportunity.

No one expressed any confidence or certainty around how long the downturn would last.

Going back to the opening point, it is not the best investment climate, there will be pressure on valuation and, perhaps, terms, and it may take longer than you would like, but deals are still getting done.