CES Talk: Venture capitalists get optimistic again in 2011

(PRESS RELEASE – January 14, 2011) – Good news from the venture panel at the January Consumer Electronics Show (for panel details pls see bit.ly/gOoGoV)

Although the competition for funding is still tough, valuations are rising and venture capitalists say they are optimistic for 2011.  Why?  Because the market for exits via mergers and acquisitions (M&A) and IPOs is improving, which means they may see some future return on their investments (ROI) after some years of drought.  “We saw the beginning of an uptick in Q/4 of 2010,” one of my panelists remarked.

The environment is a mix of the “positive” and the “skittish.”  Having pulled back from most new investments in 2009, they moved somewhat forward in 2010, and will maintain that pace in 2011 for the most part.

The number of investments these investors plan to make is not increasing.  These early-stage boutique capitalists will each make between 4-6 new investments during 2011, on par with 2010, but down still from previous years’ usual 6-8 investments.  One panelist who sees a lot of companies said he still only invests in 1% of the companies that he reviews.

Valuations are trending up, and most of the capitalists expect to pay more this year than last.  “Sometimes I wish we had been more aggressive during 2010,” admitted one.

“5x is the new 10x,” joked one of my panelists. Although venture capitalists have always sought a 10 to 20 times return on their investment, it seems the reality now is to settle for a five times return, or better if they can find that home run.  The exit markets are recovering, but may never see boom times again.

The exit window has lengthened to an expected 6-8 years, up from the previous 4-5 years.  This means everyone in the venture must carefully plan their capital strategies and investments, and sustain growth in the marketplace to reach these exits.

I encouraged the panelists to address the concerns of the audience, mostly startups in the consumer technology, media and Internet markets, and they offered excellent advice.

1. Be capital efficient.  Show that you can control your early capital and make it work to accelerate your company.  Get as far as you can on as little as you can manage.

2. Get professional help to plan your capital strategy from the beginning, so that the structure of your early rounds of investment (friends and family, angels) do not make it difficult or impossible for you to step up to professional capital when you are ready.

3. Do your homework.  Select and pursue only the venture firms who are active in your market sector and have made (or have announced that they want to make) investments that fit your opportunity.  Make sure there is an expert among the partners who will understand your market and pitch.

4. Tell the same story to all you meet.  “Remember, we talk among ourselves,” said one savvy panelist.

5. Make sure you are ready to pitch:

  • Have a complete presentation of the market opportunity and where your product fits into the market.   Make sure you are thinking of global and international markets as well as the U.S. market.
  • Refine your business model before you ask for a meeting.
  • Show how it will scale.
  • Bring major customers that provide your company with sustainable revenue.  If your company is pre-launch, bring a list of your pipeline of major customers, and letters of interest from them (these can be non-binding, but bring them).
  • Have complete financial projections that cover at least 5 years, or further, to your planned exit year.
  • Make your case.

6. Get to know your selected venture firms before you need to ask them to invest.  Their experience with you over 6-12 months will ease your way when you are ready to pitch them.

This is indeed refreshing news after the past couple of years.

But the grain of salt should be kept in view:  only 4 or 5 new investments will be made by most early stage investment groups, often less than 1% of those companies that get reviewed.  Entrepreneurs need to be more ready than ever with their business model and their pitch, to make that best first impression.  And the state of the larger economy is still an ominous unknown.

That said, there is a huge pent-up demand for capital for some of the most innovative products and services, developed on standard platforms over the past couple of years, with virtually no capital at all.  Here’s to a New Year which lets us express our tremendous creativity in new ventures that can change how the world works, and move all our economies to new ground.

About Joey Tamer

Joey Tamer is a “shadow CEO” to product and service companies. Her successes include an IPO, sales of companies at high multiples, and early stage strategic investments based on deal-flow with no loss of equity. Her Fortune 500 clients include J.P. Morgan Capital, Sony, IBM, Apple, Hearst, Blockbuster, Technicolor, Harper Collins, Discovery Channel, Time-Warner, Agfa and Scitex.  Among her many early stage and growth ventures, she includes Earthweb (IPO 1998) and iSuppli (sold for $95M in 2010).

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