As the cash shortage at venture capital and private equity firms gets worse, some VC firms are responding by:
- Reducing the number of new companies they invest in
- Hoarding cash for their most promising companies, and
- Selling stakes in existing portfolio companies for firesale prices (10-60 cents on dollar, says a recent article in the WSJ)
The problem is not just cash constraints of limited partners such as university endowments, which we’ve described in detail. It’s the lack of IPOs and reduced M&A activity: In a more normal environment, these events reduce the need for VCs to continue to fund existing investments, thus leaving more cash available for new ones.
The likely upshot for entrepreneurs and underfunded startups?
- Fund-raising will continue to get more difficult
- Valuations will continue to drop
- Your current slate of VCs may not be there for you in the next round
WSJ: At Onset Ventures, [Terry] Opdendyk says his firm’s $280 million fund raised in 2000 has collected most of its commitments from institutional investors and doesn’t have much cash left. At the same time, the fund has to keep spending to nurture numerous companies because there have been so few IPOs and sales. “We’re squeezing every dime” and may consider selling some company stakes, he says.
Onset’s $200 million venture fund that was raised in 2005 and a new fund raised this year are in better shape because they haven’t invested all their capital and still have money in hand. Mr. Opdendyk says those funds are getting an offer a week from other cash-strapped venture investors who want to sell out of their companies at a discount, often “for 10 cents to 60 cents on the dollar.” He says Onset is considering purchasing one or two such stakes.
Tom Crotty, a venture capitalist at Battery Ventures in Waltham, Mass., says the situation is reminiscent of the technology bust earlier this decade, when many venture funds faced a similar cash crunch. With few sales and IPOs at the time, venture investors were left spending money on too many companies. Ultimately, venture capitalists had to cut many start-ups loose.
This time, Mr. Crotty says, Battery is closely monitoring its $850 million fund that was raised in 2000 and which already has collected on all the capital pledged by institutional investors. If Battery uses the fund’s remaining cash too quickly, “we could end up having a shortage in the fund in mid- to late-2009,” he says. To prevent a crunch, he says the firm is now pruning the fund’s portfolio, a process that will leave more cash for the start-ups that make the cut.
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