When I was last involved in venture capital investment some thirty years ago most VC funds were quite small – £10m was considered an OK size in the UK. Today the average fund raise is probably around £100m. The investment focus has changed dramatically. In the 1990’s investment was focussed on early-stage start ups with promising technologies and it was accepted that it took time for these business to gestate. Today investments are overwhelming targeted towards “software”. Many funded businesses are simply “me-too” endeavours that may be interesting applications but are not really viable long-term stand alone businesses – at least not in the context of the costs incurred in “growing them at any cost”.
The question is why has this happened. For a good part, the answer lies in the excess of funding that has flowed into the start-up scene. Driven by zero interest rates and the lack of return on traditional investments, a lot of funding has flowed into venture capital from non-traditional sources. Living off this funding presents an enviable lifestyle for GPs. Funds no longer make “investments” but rather place a series of “bets” on what they think will be the next leader in the beauty parade and are encouraged to pump up valuations so they can trade their asset at a profit. Not surprisingly as the ponzi bubble collapses we have seen a massive reduction in the valuation once given to rising stars.
As times get tougher for VC-backed companies they may well find that their investors may have less interest in supporting them than finding another runner on which they hope to place a winning bet.
Founders will discover that they are Sardines for trading – not for eating.
If you find yourself in this situation give us a call – we may be able to help.