Paladin and Associates is an executive team that creates business strategy to eliminate strategic and operational roadblocks and puts companies on the path towards achieving business success.
Venture Capital Firms Chase New IPO’s
Bill Warner Friday, June 19, 2009
We all know that the IPO market for venture-backed companies has pretty much disappeared, substantially destroying their business model that requires high value exits via an IPO. Dixon Doll, in his interview with the Wall Street Journal gives us an update on the reshaping of the venture capital industry. Doll is a seasoned business consultant, a leading venture capitalist and the outgoing Chairman of the National Venture Capital Association (NVCA).
NVCA’s “Four-Pillar Plan”
The NVCA’s Four-Pillar Plan is targeted at restoring the venture-backed IPO market, and it takes unprecedented cooperation between the private sector and the government’s taxation and regulatory policies. Given the slap that the venture capital world just took in the SBIR renewal bill, that cooperation is not evident.
The NVCA’s direction is to convince venture capital firms to modify their financial models and business practices to focus on small-cap IPO’s, moving away from blockbuster winners. Another bubble is bursting. This will require substantial reshaping of the way venture capital firms structure their deals and the transition will take five to seven years to complete. But, given the state of the IPO market, this makes sense.
This means that venture capital firms will have to go after more deals, with less money per deal, driving for quicker exits, and culminating in smaller IPO’s. This opens up the venture-backed IPO market to a whole new set of investment banking firms that will be able to service this opportunity. It won’t be just the big firms like Goldman Sachs and Morgan Stanley.
The task ahead
Doll points out that this is going to be a painful transition. Some venture firms won’t make it. It will require a massive education initiative to explain how this can work. This education will have to include entrepreneurs, venture capital firms and investments banks who currently don’t view that they have an IPO market available to them.
There is considerable skepticism throughout the industry. Even if the NVCA pulls off this first pillar, the government regulatory and taxation policies will represent another giant hurdle to jump over. Doll has always been a positive and aggressive thinker. If anyone can make this change happen, he can.
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Venture Capital Snubbed By SBIR Bill
Bill Warner Thursday, June 18, 2009
The Senate committee unanimously passed the bill to renew the Small Business Innovation Research (SBIR) program with only partial support for venture backed company eligibility, allowing them to have access to 18 percent of the Department of Health and Human Services and 8 percent of all other agencies. Read the details in the Wall Street Journal.
The problem with venture capital backed companies
This debate has gone on for years and comes down to two opposing views. The first is those that think that grant funding is an integral part of a company’s financing strategy and that there should be no restrictions on the amount of private equity money invested in the company. The other view is that grant financing should be devoted to private companies that are not substantially owned by venture capital firms.
The debate continues
This is not the last we will hear about this debate. The National Venture Capital Association and the Angel Capital Association are strong advocates for lifting the restrictions on venture capital backed companies. In any economy, it seems like a good idea to strengthen the financing capability of entrepreneurial businesses.
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Institutions Decrease Private Equity Investments
Bill Warner Tuesday, June 16, 2009
As we all know by now, institutions who invest in venture capital are backing away from this asset class. Now, the Coller Capital report provides some quantitative evidence in its most recent survey.
Institutions reduce investments
The bottom line result is that 20 percent of institutional investors plan to decrease their allocations to private equity this year; the largest decrease since the survey started in 2004. Another 15% plan to increase their investment, but even that is substantially down from previous years.
The core problems with institutional investors
The report cites the fact that there are fewer private equity firms to invest in, and many more will not be able to raise additional capital because of their poor performance. The survey predicts that there will be a 28 percent decline in the number of venture capital firms that will be able to raise additional funds. A shocking 84 percent of the institutions have chosen not to reinvest with their existing general partners. We know that the IPO market for venture capital backed companies has dropped to near zero, and that acquisitions are harder to get as well. This puts a major hole in the venture capital firm’s business model which requires a huge upside exit in order to achieve their expected returns.
Well, institutions haven’t fared that well either. Many have experienced 30 to 40 percent declines in their value with the market downturn, putting pressure on the ratios that govern how much they should be investing in this asset class. So, there are problems on both sides of this coin.
Expect a power shift in venture capital
There is good reason to believe that institutions are going to have more power in any negotiations for new funds. It’s a buyer’s market. There will be a lot of pressure on getting higher value for the fees that venture firms charge and deal terms between them are going to be more favorable to the institutions.
All said and done, this means that entrepreneurs have really got to have a great business story to attract venture money. It has been getting harder and harder to acquire venture money since the end of 2008, and it doesn’t like it is going to get any better this year.
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Financing the Launch of Your Company
Bill Warner Tuesday, June 16, 2009
Once you have gotten your company through the proof of concept stage and are now at the point that you have a product or service ready for market, you will need to finance this phase of your company’s growth.
Many of the alternatives that were considered for the seed financing of your company can play a role in this stage of financing as well. The additional alternatives to consider for this stage of financing are:
- Bootstrapping
- Strategic Partnerships
- Customer Partnerships
- Angel investors
Let’s take each of these and explain the purpose and implications.
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Manage Your Financials Like a Pro
Bill Warner Monday, June 15, 2009
Wow, here is a great testimonial from Anita Campbell, a small business owner, about managing your financials. I wish every small business owner had this much discipline.
Cash is really king
The biggest mistake that small business owners make is not really understanding their cash flow. Unfortunately, the result is too often running out of money followed by business failure. All of this comes from properly accounting for all of your revenue, cost, expense, and other cash transactions. If you are doing this, you simply need to look at your cash flow statement to see where you are. There you can see where you stand with:
- Money that is owed to you by customers
- How much you owe others
- The effect of depreciation
- The gains from financing activities
- Implications of changes in inventory
- Cash implications on debt
If your ending cash balance is declining, you may be in trouble. Watch this metric like a hawk.
Look to the future
Equally important is your projection of cash flow for the next 6 to 12 months. I strongly urge you to develop a cash flow projection on your own or with the help of a professional financial person. You may be fine today, but the growth of your business may put particular strain on your cash position. Think ahead to see future cash crunches so you have time to find the financing that will carry you through it.
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Paladin and Associates responds to client needs for a business plan, strategic planning, executive coaching and writing a business plan. A common question that Paladin and Associates answers is how to write a business plan or how to do financial management and planning. Paladin and Associates' clients ask for help finding angel investors, business consultants, executive coaching services, and business consulting services. We also do strategic business planning, business process consulting, business mentoring, sales consulting, and executive mentoring. Business management consulting and sales process consulting are common services. We have over 30 years experience in the role of executive coach and business coach and are among the best business coaches in the area. We are often called upon for writing a business plan and the strategic planning process.