So what will be the watchwords for financing entrepreneurial ventures in 2009?
- Bootstrapping
- Angel investments.
I have had some interesting conversations with several small business friendly bankers over the past couple of weeks. They are telling me that with the tight margins created by the interest rate cuts, they will be very stingy with new lending for entrepreneurial deals during the foreseeable future. And that was before the recent cut by the Fed.
Family and friends will be tight on investing in new deals as their investment portfolios have tanked. They no longer feel wealthy, so will not be as interested in altruistic investments into high risk start-ups.
VCs are reeling right now. From Techcrunch:
The number of partners listed on some VC Websites is already quietly shrinking. Some new VC funds are having difficulty raising money and even existing funds are running into problems collecting commitments from strapped limited partners.
The carnage on Wall Street is having a trickle-down effect on venture capital firms. The limited partners who typically invest in VC funds–university endowments, pension funds, investment banks, other institutions, and wealthy individuals–are short of cash right now. Harvard’s endowment lost $8 billion in the past four months alone. Many limited partners simply cannot honor capital calls from VCs. (When a VC firm creates a new fund, it does not collect all the money at once. Instead, it receives promises from limited partners that they will invest when the capital is needed).
Angel investors seem to be in a little better shape. Those who work with angels tell me that deals are still being funding. They see opportunity in the current market for significant long term returns. They tend to have a longer time horizon than VC firms and have only themselves to be accountable to for the deals they fund. This backs up a recent report from Angel Capital Association which stated:
Angel group leaders report in a recent survey by the Angel Capital Association (ACA) that investments have decreased this year and will decline as well in 2009 compared to 2007 due to the current recession. However, some angel groups have increased their investment activity this year and believe they will make additional investments in 2009 as new opportunities arise from difficult economic conditions.
And those new opportunities also will be what prudent bootstrapping entrepreneurs who know how to get the most out of every dollar can pursue over the next couple of years. As Rick Newman points out at US News:
But recessions are times of “creative destruction,” and while the destruction tends to dominate the headlines, new opportunities often sprout as companies seek new ways to grow and those resistant to change drift into obsolescence. Plus, recessions end. And when this one does, we’ll all be ready for a party–on a careful budget.
Since VC’s have been putting all their eggs in one basket (which is usually being held by their con-men buddies) they now have to deal with the consequences.
God forbid they had actually done what their sites say, “to encourage the entrepreneurial spirit” and “fund disruptive technologies.”
That would have required them to perform due diligence and maybe taken a few intelligent risks on some startups.
If the funds had invested only 5% on growing new companies instead of creating a house of cards by just tweaking & flipping, things would not be so dire for them now.