There is an article making the rounds (link: here) forecasting a drought in late stage fundraising coming soon: “When? Perhaps as early as three months from now. Surely no later than six.” As I’ve have written before, I’m always impressed, but somewhat bemused, when people have sufficient confidence in their forecasts to use words like “surely”. In this case, I don’t vehemently disagree with the author’s conclusion, but I disagree with his level of conviction. This post lays out some reasons why he may be wrong … to be clear, they aren’t reasons why he IS wrong; I have no idea if he’s wrong or right. I’m just pretty sure he’s wrong to be so certain that he’s right.
One of the critical underpinnings of his argument is the data suggesting that venture capital investing is outpacing fundraising, ie, that VCs are investing more than they are raising, and that therefore their coffers will run dry soon. I think this misses a few fundamental dynamics at work. The first is that late stage venture capital investing is no longer just a game for venture capitalists. If you look at the largest deals of Q2 2011, you find these names: General Atlantic, Tiger Global, Goldman Sachs, Credit Suisse, Great Hill Private Equity, JP Morgan and Harbourvest. I guarantee that none of those firms’ prodigious fundraising success is included in the venture capital fundraising totals, and yet they took leadership roles in financings totaling over $1B in the second quarter alone. This list doesn’t include the increasingly active corporate players like Google Ventures, Visa, SK Telecom and J&J, to name but a few; 10% of the dollars invested in the industry in Q1 2011 came from corporates, the most since 2001. It also doesn’t include the mutual fund companies like T. Rowe Price, international players like DST or the other non-VCs who are investing through Second Market and Sharespost. Based on the high and increasing activity levels of this long list of investors whose activities are showing up in the “dollars invested” category, but not the “dollars raised” category, I’d be shocked and worried if there wasn’t the gap that the author is so concerned about.
The other primary point is that the stock market is looking shaky, and that therefore, before too long, venture fundraisings will follow: “Another worrisome omen is that venture funding tends to lag behind stock market moves by a quarter or two.” The market bottom during the (first) credit crisis was Q1 2009, so I went and looked at what the large financings were in Q3 2009, to see if this lag did indeed affect investor psychology. I would say, not so much. In Q3 2009, Twitter, at that time pre-revenue, raised $100MM at a $1B valuation. In addition, two companies that ultimately went bust raised $350MM in aggregate: Solyndra and Canopy. If that’s the kind of incisive due diligence that we should anticipate in Q1 2012, I’m not sure entrepreneurs should be too nervous.
And so, my urgent message to entrepreneurs is this: the end is nigh! Unless it’s not. Run your company sensibly, raise money prudently, focus on hiring great people and delighting your customers, and read fewer hysterical blog posts.