Below you'll find my article from the March '09 issue of EEC Perspectives, entitled The End of Gloom and Doom.

I like my gloom and doom as much as the next guy, but a whole year of unrelenting gloom and doom is overdoing it. Looking back on a year’s worth of numbers, it occurs to me that there is a lot to say that is not in the numbers.

Entrepreneurs are like weeds

If you just look at the national numbers you could come to the conclusion that there are fewer deals than last year, that the VCs are taking longer to invest and are investing at lower and lower valuations, and that all of this just acts as disincentive for entrepreneurs to start new ventures. But, anecdotal evidence is to the contrary. I polled some of my partners, and we all agree there is steady stream of new start-ups in all industries. They are not necessarily getting financing from VCs. In fact, the pattern that I see evolving is that entrepreneurs spend a bunch of time (many months) hiking up and down Winter Street to no avail. After that, they figure out other ways to keep moving forward by self-funding and going to family and friends or others with special affinity, and they make do with less. In a number of cases, they seem to me to be happier and more productive once they accept that there will be no VC money and they figure out something else. Entrepreneurs are like weeds; it will take more than a long dry spell to kill them off.

Smart investors can learn from their own mistakes

Before writing this paragraph I went back and checked an old closing binder, and, yes there it was, a 5x participating preference. I have been waiting and bracing myself for what I imagined would be inevitable – the return of onerous terms (not to be confused with really really low valuations). The ones I have been expecting are multiple X participations and full ratchet antidilution provisions. The practical effect of a preferred stock with these provisions is, of course, to leave anyone who is not invested in that series (especially the common holders) with little or nothing. My sense is that investors discovered how disheartening and demotivating these provisions were in the last cyclical downturn (and that they left a very bad taste in the mouths of many entrepreneurs). So far, I have not seen them. I have seen bottom fishing valuations, but that is another matter. Investors may not learn from the mistakes of others, but at least they learn from their own.

Rumors of the death of venture capital

How many times have your heard (or read): the venture model is broken or average venture returns were about 1.5% in the last eight years (or something like that), or there is way too much money invested in venture funds, or the like? There is, of course, some kernel of truth to each of those statements, but they need to be looked at in some context. It would be hard to deny that there are great opportunities to found and build great new companies. These opportunities seem self-evident in certain sectors such as renewable energy and clean technology, but they will also exist in sectors that don’t have as much play in the media as renewable energy and clean tech. Mobile technologies, cloud computing, data storage, industrial efficiency and robotics come to mind. Institutions are going to see the opportunities and they will want to invest. To date I have not heard anyone suggest a more efficient way for large funds to make these investments than through venture funds. Furthermore, venture funds were raised in 2008 (way less than in 2007, but raised nonetheless). If people are putting money in venture funds at this point in the cycle, they will continue to do so in increasing amounts in ’09 and ’10. Rumors of the death of venture capital are greatly exaggerated.

The darkest hour

As of this writing, it is hard to find any good news. The Dow looks like it could easily drop below 6000, there are no IPOs, acquisition activity is way off and a lot of it seems to be fire sales, and venture funding is very hard to get even at rock bottom valuations. I think Bernanke said that the current recession might be over by year end. That is Fedspeak for “under the most optimistic circumstances it will stop getting worse in the fourth quarter.” This is hardly an optimistic statement. I keep searching for a harbinger of better times, but nothing obvious has appeared to me. Having said that, you would not expect to see, touch and feel specific evidence of a rebound until after hitting bottom. Right now visibility is nil, but the darkest hour is just before dawn.

Maybe I have been down so long it looks like up to me, but I am an optimist. All the gloom and doom has given everyone something to talk to complete strangers about, but it is time to move on.

To download the entire March issue of EEC Perspectives just click here (.pdf).