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Silicon Valley - Shaky times, but not attitudes

19 June 2009

Tristen Langley, of Southern Cross Ventures, is an Investment Director that has significant experience on both sides of the pond. Here Tristan compares her recent experiences across the US and Australian technology venture markets during a time of unprecedented economic change.

We are almost to the halfway mark of 2009 and so far, the World’s tectonic plates have shifted in more ways than one. From the anniversary of the Sichuan, China perils to the much-televised Italian earthquake, the cascading tremors appear as an allegory for the financial shifts that have rapidly evolved into a global crisis. I was last visiting California in January and the 44th President of the United States, Barack Obama, had just been sworn into office. Sadly, Obama-supporters’ euphoria was overshadowed by the ripples of bad economic news, which appeared to resurface as cruelly as an earthquake aftershock. Since January, the US market has plummeted to its lowest levels in a decade and then rebounded to the exact same January-level all in the course of less than six months!

During my US visits, I have been repeatedly asked, how have these tumultuous times affected a) Australia and b) my industry? I thought it fitting to write from the State that represents over 20% of the 2009 earthquakes that have been traced and documented worldwide and reflect on the ramifications of the economic shake-up within my purview, that is, part b), the venture-capital and technology sectors. (In response to part a) given my anecdotal assessment of how little Australians have adjusted their lifestyles and home-ownership levels, I’m not certain that my opinion on how Australia is faring is entirely accurate – I would have said, “she’s the lucky country you know, she’ll be right, mate!, it certainly appears that way”).

There are three primary dimensions upon which our industry has been negatively affected, namely:

1) Fewer new investments are being made. In the first quarter of 2009, approximately US$3 billion of venture capital was invested across 549 deals in the US. By comparison, US$7.7 billion of venture capital was invested in the first quarter of 2008  [1]. When speaking with peers within the industry, the pace of investment is simply, slower. There is little compulsion to move quickly with new deals and there is a general sense in Silicon Valley that prolonging time will mitigate some risk also. With heavy venture capital investment over the last three years, ~ US$65 billion in first round and follow-on financings, most venture capital managers are turning their attention to ensuring their current portfolio companies are successful and have the resources to survive the downturn.

2) The flow of funds to venture capital firms has lightened. The fundraising experience for venture capital firms, even established funds, has been challenging. Limited Partners across the world have scaled back their alternative investment allocations and more specifically funds dedicated to venture capital and private equity, however, in some instances, I have heard that they have increased their allocations to specialized funds, distressed funds and some hedge fund categories. No surprises here. The overall market downturn has trimmed everyone’s pockets, including the world’s largest fund managers and primary sources of venture capital funds. Subsequently, smaller funds are being raised and many venture capital firms won’t be able to raise another fund for some time.

3) Exit opportunities and the IPO market have diminished remarkably. By comparison, there were 273 IPOs in the USA in 2007, 43 in 2008 and only 7 for the first part of 2009 (during the last recession in 2003 there were 68 IPOs). The companies that have managed to raise funds on the US exchanges include, OpenTable (OPEN) and SolarWinds (SWI), DigitalGlobe (NYSE: DGI), RosettaStone (RST), Bridgepoint Education (BPI), Changyou (CYOU) and Mead Johnson Nutrition (MJN). One observation that over half of this year’s IPO-companies have technology platforms as the basis for their product or service. A few alternative ideas have emerged to address the IPO and exit constraints, including, the private exchange, XChanged and venture capital secondary funds such as well-established SaintsVC  and newly-founded Opteris.

Despite the prevailing economic conditions, from an investment standpoint, the flow of new investment opportunities is strong, if anything the range of companies in terms of sector and stage has broadened as more companies have resorted to alternative forms of financing and have extended this to venture capital. From a human capital standpoint, I am delighted to see the ability to recruit a high-calibre of experience and talent into emerging companies. Whereas emerging technology start-ups may have appeared too risky in the past, the uncertainty in larger, more established companies has created an available pool of talent willing to adapt their career paths.

Finally, from an attitudinal standpoint, problems continue to be solved with technology and innovative ideas continue to propagate with the flair and courage possessed by all entrepreneurs and emerging companies. One illustration of innovation coupled with the communication of these grim times is the news rendition of FlypMedia. Moreover, I recently read an article that reported 1 million downloads for a Stanford course on iPhone application development; that translates into a lot of people curious about building new applications for the mobile phone. I continue to meet with companies whose products and services reach across a wide breadth of sectors, payments, security, education, healthcare management, loyalty programs, business process automation, data management, digital media, wireless networking, water conservation, advanced materials applications, renewable energy and storage, video streaming and online search, to name a few. With fewer venture-backed companies, the competitive pressures to produce ‘half-baked’/’partly-useful’ products have lessened. Thus, I believe more thought and prescience will be put to work in forthcoming innovations and solutions.

In conclusion, the earth is moving for many of us and there are no guarantees that the ground will be firm for a while; that being said, the most nimble and resourceful companies will tend to grow and develop in this environment.  These firms in turn, will be in the optimal and enviable position to become market leaders as the crisis subsides.

[1] Source:
https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=industry

Tristen is currently Investment Director at Southern Cross Venture Partners, www.sxvp.com. Tristen previously worked with Skype as their North American Business Development and Marketing Manager, and Draper Fisher Jurvetson, www.dfj.com (one of the world’s leading technology focused venture firms)

Written by: Tristen Langley

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