Re-post from StartupCFO Mark MacLeod Is the worst over?

Healy Jones, a friend who has spent his whole career in banking / VC wrote a frank and open post yesterday about why today is his last day as a VC. It’s worth reading. Some of his reasons are personal. And of course, its perfectly natural for an associate to leave a fund. Still, other reasons are structural. He has a pretty bleak assessment of the current state of the industry right now:

“VC is less fun these days. I went into technology banking @ H&Q because I loved the idea of working with young technology companies. And I still love the rush of hearing about a new technology and working with an entrepreneur building a dream. These days, there is a ton of effort is being spent re-sizing existing portfolio companies and doing downrounds. Sure, some new investments are still getting done (and Atlas is in a very solid state to make new investments, with a new fund and committed partnership). But all the Excel cap-table anti-dilution modeling and nasty negotiations with co-investors over companies that aren’t meeting expectations just isn’t enjoyable, and it isn’t really why I got into venture in the first place. I’d love to spend more time growing companies, but given the pressures that any VC with an existing portfolio must be having right now the best place to help grow a business, for me, is going to be within an actual startup.” This got we wondering: Is the worst over? Is Healy seeing the bottom or are we in for a rough ride? 

One of the reasons why entrepreneurs and investors are having a tough time is the beating that public markets have taken since the credit crisis. Anyone who’s invested in the public markets feel this on a personal level too. When the valuation of the biggest acquirers of startups dropped, valuations throughout the food chain dropped too.

I checked this morning on the 6 month stock charts for some of the most active acquirers: Cisco, Google, Microsoft, Oracle and Verisign. All of them are trading well above their 52 week lows and all are trending up.
stock chart -

This is good news. Exits don’t happen when companies feel poor. They feel poor when their stock is down. I have no doubt that the downrounds and resizings that Healy talks about are happening across everyone’s portfolio. Still, I believe there are positive things happening.

Of course, we don’t see press releases for the bad stuff. So, when we look in the media, all we see is the good stuff. On that front, deals are still getting done (both fundings and sales). Some new funds have formed (Healy’s fund Atlas recently raised a new fund).

Here in Canada of course, the Ontario and Quebec governments have made big recent commitments to private equity and funding innovation. That money won’t come online for several months, but when it does it will have a positive impact as well.

It has never been easy to raise money. Expecations are up and valuations are down. So, it just got a little harder.

On the M & A side, I hope we will start to see exit volume picking up as well. On the lower end of things (the deals that don’t get the headlines), deal volume is up. Corum Group who serves the mid and lower markets reported that Q1 was its busiest quarter ever.

So, while I’m under no illusions about the difficulty of funding companies and generating good exits, I am hopeful that the worst is over. What do you think?

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