I have been remiss in posting to my blog as I got caught up in the perfect storm of commitments the first half of 2008. Everything was going well until a company that I was advising, Skyway Systems, ran into trouble and I stepped in as interim CEO. This was on top of commitments at Airwide (helping CEO with acquisitions), DegreeC (helping define strategy for a data center thermal management business) and Boston University (teaching an MBA entrepreneurship course and organizing a VC workshop).
While raising money for Skyway I met with early stage venture capitalists in Boston, California and Colorado. It was an interesting reality check of the early stage venture capital industry in the US. I had been hearing from entrepreneurs that it was getting harder to raise seed and series A funding from Bsoton area VCs. My experience was that it was as difficult in California and Colorado. Colorado's VC firms are mostly in fundraising mode. Boston and California firms seemed to more focused on later stage firms. Early stage companies need to be in an ever shrinking "sweet spot": defensible IP (woe if you are a software company), proven management (ie you have made money for a VC), and demonstrable market need (preferably with a customer LOI in hand). The only concession I saw was that VCs were now willing to travel so companies did not have to be local. On the other hand raising money for an acquisition that creates a scale company appears to be readily available.
I completely understand why early stage VCs would want to shrink their sweet spot, it reduces risk for them and frankly makes it easier to screen opportunities. However it does leave a gap in the market for seed and series A funding needs for first time entrepreneurs and products for unproven/nascent markets. This shrinking sweet spot is probably a good thing for VC returns, right? Nada, VC returns have been anemic the past few years, partly being blamed on the lack of an IPO exit market for technology firms. It seems to me that we have to reset expectations of what early stage VC returns have to be. Companies that result in IRRs of 15-20% are still great companies and deserve funding. A new early stage VC business model has to emerge as some LPs will certainly fund managers who are willing to take reduced compensation commensurate with lower returns. This will be a good thing for the industry.
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