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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Factoring Is Hard to Get
Bill Warner Monday, June 15, 2009
Factoring your receivables has always been an alternative to satisfy a short term cash need. Read about some of the details about how it works in Open Forum. Although factoring continues to be a financing alternative in today’s economy, it is increasingly hard to get.
Factoring hurdles
Remember that banks are really tightening their due diligence and qualification criteria for any form of business financing, including factoring. In order to qualify for this form of financing, you face a redoubling of your justification:
- You have to have a solid history of positive financial performance
- Your debt ratio will be analyzed closely
- The receivables have to be from very reliable sources
- It would be better if they know you and you have a positive financing history with them
- You may be asked for additional backing, including personal guarantees
Other financing alternatives
Really, there are not many other alternatives except for factoring companies. They are hard to find and you really need to check them out before you engage them. A positive referral from someone you know who has had a positive experience would be the most desirable.
Nevertheless, when you are in a cash crunch, this is an alternative that you may not have a choice in passing up.
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Approaching Angel Investors
Bill Warner Friday, June 12, 2009
You only get one chance for success when approaching angel investors. You need to make the most of it by being very well prepared. Here’s some really solid advice from Jim Casparie in his Forbes article. Take a look at Paladin’s suggestions as well.
Like the Boy Scouts, “Be Prepared”
You would never think of approaching a potential customer or alliance partner without being well prepared. You have a purpose, an agenda of what to talk about, a desired outcome and a negotiating position. It takes more than a little work to get ready for such a meeting. Well, it’s the same for getting ready for angel investors. Being prepared includes:
- A complete business plan including financials
- Knowing all about the angel investor group, including their business interests
- Referral by an influential business person
- A concise business plan presentation that is customized to the angels group’s interest.
- Practice, practice, practice; especially answers to anticipated questions
Attitude and mindset matter a lot
No matter how good your business may look to investors, they are really investing in the entrepreneur. Investors know that passion makes the difference. So, let it show in a balanced and business-like way. Angels have to have confidence in the entrepreneur or they won’t invest.
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Cleantech the Target of Venture Capital Firms
Bill Warner Wednesday, June 10, 2009
Talk about major shifts in investor interest, cleantech is getting an incredible amount of attention from global venture capital firms according to the 2009 Global Trends in Venture Capital Report by Deloitte. They are perhaps hoping for attractive incentives from government initiatives as global warming programs kick in throughout the world.
Cleantech is hot
Just five years ago this annual survey indicated some interest in clean technologies and the life sciences. This year, regardless of fund size, there is tremendous interest from VCs in both of these sectors, especially clean technologies, where more than six out of 10 respondents anticipate their investment levels to increase and another three out of 10 will hold their investments at the same level.
Among U.S., UK and Israeli investors, about half expect to increase their investments in cleantech, while about seven out of 10 AP respondents and European respondents expect their cleantech investments to increase. Two-thirds of respondents from the Americas plan to increase their cleantech investments. This interest could be because they are seeing an increase in government/political support for cleantech and VCs are looking more to government participation in both investments and incentives.
Other investment sectors are mixed
Semiconductors and electronics could suffer a 50% reduction in investments, while medical devices may see a nice 37% increase. Telecommunications could achieve an underwhelming 15% increase and 29% decrease. Software, new media, social networking, biopharmaceuticals and consumer businesses will hover around 25% increases with similar decreases, while more than half will keep their investment levels the same.
Weathering the storm
Keep in mind that this is all in the context of a worldwide economic recession. In general, VCs are decreasing their overall investing dollars, focusing on their best companies and increasing their allocation to later-stage investments.
Lower valuations could present opportunities for VCs looking for a good deal. It is too soon to say that they will take them. Larger firms may experience a bigger slowdown than the smaller firms. Just more than half of respondents from firms managing $500 million or more are decreasing their level of investment, compared to about one in three of those managing $99 million or less.
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Asia the Darling of the Venture Capital World
Bill Warner Wednesday, June 10, 2009
According to the 2009 Global Trends in Venture Capital Report by Deloitte, Asia is becoming one of the most attractive investment geographies in the world. In addition to the already understood impacts the economy has had on the venture capital markets, this reports adds a global perspective that we don’t often see. However, these trends are not new, but are more dramatic this year.
Venture Capital Attractive in Asia
Half of all respondents expect their investment levels to increase in Asia (excluding India); while 43 percent expect to increase their investments in India over the next three years. In 2007, 41 percent of respondents indicated an interest in expanding their investment focus in Asia Pacific. About one-third expect to increase their investment levels in South America. Only 17 percent expect to increase their investments in North America, the same as 2007.
Interest is worldwide. When it comes to interest in Asia and India, UK respondents are the most enthusiastic, planning either to increase investment levels (67 percent and 58 percent, respectively) or keep them at the same levels (33 percent and 42 percent, respectively).
But, about nine out of 10 U.S. VCs are also increasing or maintaining their investments in Asia and India and about the same number of respondents from Asia Pacific have similar plans.
Declining Interest in North America
Investment interest in North America seems to be decreasing. Only 29 percent of VCs in the Americas (excluding the U.S.) plan to increase their investments in North American countries while 37 percent expect them to remain the same. Twenty-two percent of Israeli investors plan to increase their North American investments while 33 percent expect investment levels to remain the same. European investors (excluding the UK) are looking at a 16 percent increase and half expect their investments to remain the same. Only 15 percent of Asia Pacific VCs expect to increase their investment in North American countries while 40 percent expect it to remain the same. In the UK, a mere 14 percent plan on increasing their investments but 48 percent plan on keeping their levels the same. Even among
U.S. VCs, only 16 percent plan to increase their North American investing levels while 71 percent expect their investment levels to stay as they are.
This report further substantiates that the global venture capital market will continue to play an increasing role in venture capital firm investments.
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Reshaping Venture Capital
Bill Warner Wednesday, June 10, 2009
There’s a new analysis from the Kauffman Foundation that captures the situation that venture capital firms find themselves in today. It’s very informative and worth your time to read.
The usual observation is that venture capital is in trouble because of excessive and disadvantageous regulations, especially Sarbanes-Oxley, and the fact that the IPO market has dried up leaving them with no viable exits.
The core problem for venture capital firms
When you look at the total amount of money committed to venture capital hovering around $250 billion since 2000, versus the performance of venture capital hovering around zero since 2004, Kauffman concludes that this level of venture capital money is not sustainable because the market they are focused on is shrinking. It is this over commitment of venture capital money by limited partners that has led to its collapse.
Likewise, the pace of venture capital investments is currently hovering around $30 billion per year, which is 2 to 3 fold the pace of opportunities. This is arguable in that there are lots of new opportunities in biotech and cleantech that could justify this difference. Nevertheless, venture capital performance doesn’t support this pace.
What will happen to venture capital
According to Kauffman, the likely outcome is that limited partners will decrease the amount they invest in this asset class. This certainly is a trend we have been seeing for the last several months, mainly driven by the downturn of the economy which has caused them to reconsider their venture investments. This action will cause an appropriate adjustment to the overall amount of venture capital in play and the pace of investment, the result of which will be a realignment of valuations and ultimately improved performance.
Kauffman believes the adjustment could be to $12 billion per year driving a reduction in committed capital to around $100 billion.
How are venture capital firms responding
Meanwhile, venture capital firms are responding to this challenge by finding new ways of doing business in an entirely different business environment of lower investments required, lower valuations and lower returns. We have seen new forms of syndication, new alliances, and new business models all of which are responding to the downturn of the venture capital market.
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You May Want Angel Investors
Bill Warner Tuesday, June 09, 2009
I am often asked by people from all over the United States if I know any angel investors that might be interested in their company. I then ask them about their business and their readiness for angels. Unfortunately, the vast majority of them are not ready to approach angels. Their question is easy to answer, but the advice they need before they attempt it is pretty extensive.
Be ready for angels
There is a lot of work that needs to be done before you approach angels. Angel investors are reasonably sophisticated in their investment habits. You will need to be able to answer a lot of simple questions. If you mess up the answers, you will not get another chance to see them again. I have called this opportunity similar to using a one shot rifle. If you miss, you lose any chance for another shot. Take a look at some of my blog articles on this like this one on How to Find Angel Investors. Read also this article from entrepreneur.com.
Before you ask about angel investors, be prepared by:
- Preparing a well thought out business plan
- Doing some research on angel organizations to determine which ones to approach, starting with the ones in your area
- Gaining an understanding of the angel investor’s business selection process
- Finding ways to get referrals to the selected angels, which works better than cold calls
- Pulling together a well practiced investor presentation
- Practicing answering the typical angel investor questions
Make the contact with angel investors
Once you have prepared yourself, make the contact with the angel investor. Now you can answer their questions. They will soon realize that you have done your homework. With this positive reaction, you can then carry on a discussion about your business and get a commitment to a meeting to formally present it. This is the way to do it. If you come across as unprepared, unfamiliar with the process, naive about how angels operate or don’t really understand your business, you will never get to first base.
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Go For Grant Financing For Non-Profits
Bill Warner Sunday, June 07, 2009
With the stimulus money coming down hill like an avalanche on steroids, now is the time to really get familiar with the grant programs that your business might qualify for. Take a look at this article in entrepreneur.com that makes the point in detail. I am by far not an expert at getting grants, but I have gotten my first one for a new non-profit organization that we are creating to support entrepreneurs. As I think through the experience so far, there is a lot of similarity between filling out a grant application and writing a business plan.
Grant writing discipline
Just as in planning your business, preparing for a grant application has similar discipline:
- Establish quantitatively the market you intend to serve, and make sure it is focused on the consitituency that the grantor requires.
- Explain the service you will perform, insuring that it truly meets the needs of the market cited.
- Show that you will be performing a unique and differentiated service. You cannot be redundant with other organizations.
- Clearly identify the results you will achieve over time, usually expressed as jobs or revenue created. You would be surprised at how many applications don’t nail this one.
- Lay out a clear plan of launching your service and executing the plan you are committing.
- Create a well thought out budget that ties to your plan of execution, clearly showing your use of the grant funds.
All of this sounds pretty familiar right. Well it is. Use the same concepts as if you were writing a business plan.
