Tuesday, January 5, 2010

Use The Cloud, Conserve Capital;

Many people are asserting that Cloud Computing dramatically reduces the cost of starting a company. On behalf of the many entrepreneurs reading this post, I sincerely hope this prediction is correct, because capital will be tight for at least the next couple of years.

Writing in Xconomy, Michael Greeley describes the depressed state of the venture capital environment here in New England. Michael is a General Partner at Flybridge Capital Partners and Chairman of the New England Venture Capital Association (which has lost 22 per cent of its members in the last two years).

I suspect that Angel investing has also declined. I’ll ask James Geshwiler and Marianne Hudson of the Angel Capital Association if they have any quantitative information for us. The lack of liquidity (see below) continues to be a barrier for Angels.

Here are some excerpts from Greeley’s posting:.

  • The venture industry weathered a swift-yet-painful contraction in 2009, which shows little sign of letting up. In 2008, the U.S. venture capital industry raised nearly $30 billion; although the 2009 data are yet to be compiled, it appears that last year the industry will have raised less than $15 billion—which may be the new annual reality. For entrepreneurs, this contraction will continue to make capital precious and hard to access.

  • New England-based companies raised nearly $3 billion in 2008; my guess is that this number will look closer to $2 billion in 2009. The New England Venture Capital Association, which I currently chair, had 138 dues-paying members two years ago; right now, we have 108 members. Fortunately for New England, more than 20 percent of all venture capital is managed by firms based in Massachusetts.

  • I continue to see great opportunities in the convergence of the IT and life sciences sectors, which New England is uniquely positioned to exploit. There are also wonderful opportunities in cloud computing and with new advertising technologies, but all of this is complicated by the absolute dearth of liquidity.

  • The real economic recovery is still a few years away. All of us are desperate for predictable, sustainable, and meaningful liquidity. Many of our portfolio companies are at a point of maturity, where in more normal times they would either go public or be sold at attractive M&A prices. Average holding periods have extended to more than eight years, which is unprecedented; normally VC’s expect this to be between four and six years. There will be around a dozen venture-backed IPOs in 2009; this would be closer to 100 in more normal years.


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