Saturday, 4 October 2008

Silicon Valley Goes Dry? effects of the credit crunch on VC funding

Redherring trumpets that "Silicon Valley Goes Dry", in yet another report trying to figure out the impact of the current financial malaise on technology VC. So far, I've come across all sorts of tales of doom, and in the RedHerring report the lack of M&A exits and IPOs (in part due to the lack of bank leverage) is cited as hitting exits- which in the next few months must be inevitable. It then goes on to suggest that "...the collapse of IPO and M&A markets mean they [VC funds] won’t be repaid as quickly. That means VCs won’t have funding to finance new companies or to add follow-on rounds for current companies". Erm, not exactly. Whilst lack of exits may hit some fund returns, if their timing is unfortunate particularly, VCs are normally not allowed to re-invest the returns from their exits. That means that VCs who have raised funds should still have the committed monies to invest from for some time. However, the other side of this coin is that VC funds do usually rely on their investors providing the cash in drawdowns to the funds as required. Normally as the fund's investors are financially solid, and once committed they are contractually obliged to follow-through, there is no financial risk to the fund itself. However, if any of the fund's backers fall, then that backer would be unable to meet its obligations. Should that happen then the fund's constitution often allows the other investors to choose to hang-on to their cash. That MAY mean that a small proportion of financial institutions falling, could cause some funds to "shut up shop" entirely. It's too early to say if this will happen much, but Venture beat certainly cast some doubt on at least one fund. Fortunately, none of our backers appears in any way effected, but it does show how hard it will be for any of us to anticipate exactly how this crisis will play through to technology businesses. Perhaps venture-backed businesses should start asking some questions of their VCs! Thanks to Anders.B for the image.

Friday, 3 October 2008

Survey on Corporate Finance Advice

I was curious to see what the aggregated view of the portfolio companies was on Corporate Finance advice. So I asked our portfolio companies to give us some feedback which I've summarised below. Any comments would be very welcome!