With Exits Barred, VCs Keep Investments Flat

If you believe the venture capitalists on Friday’s conference call about the latest MoneyTree Survey results, which covers venture investing in the second quarter, now is the best time to contact them with your ideas. Just because the exit environment is brutal doesn’t mean VCs won’t continue to put their time and dollars into seed and early-stage deals, two of them said. And so far the data bears that out. But if the exit environment stays grim, early-stage fundings will drop as well.

Venture capitalists invested $7.39 billion in 990 deals in the second quarter of 2008, according to a report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters. That’s slightly less than the first quarter of 2008, when $7.5 billion was invested in 977 deals, and flat compared to the second quarter of 2007, when VCs placed $7.37 billion into 1,033 deals.

John Taylor, VP of research with the NVCA, said that there’s no need to sound the alarm on the exit environment just yet. He also noted the fact that IPOs are more difficult to complete than they used to be. Taylor tied the inability to take a company public or sell it to “fears of the macro economy” and a market that’s unwilling to bet on early-stage companies. But he expressed confidence that once investors realize that the overall tech sector is strong and resilient, in part because it has global exposure, “the slowdown in the exit market will stop.”

Meanwhile, the MoneyTree data shows a buildup of companies that have raised later-stage financing, with 318 late-stage deals getting money in the second quarter, the highest number ever. If those companies don’t exit within the next two to three years, VCs will have to start selling at a loss or pushing firms into bankruptcy. Those types of decisions take up a lot of time and effort on the part of general partners. And that’s why it soon may not be a great time for early-stage companies.

Trevor Loy, a managing partner with Flywheel Ventures, a seed-stage firm focused on cleantech and hardware deals, said that if a VC can carve out the time and allocate the capital, seed investments made now will reach their full potential in five to seven years’ time and will be strong contenders for exits. However, he also noted that “venture capital is a return on time rather then just a return on capital,” and that it can be hard to juggle a lot of late-stage investments while undergoing the rigors of starting new businesses.

So as VCs are trying to negotiate exits and attend board meetings for companies that they need to get off their plates, they also need to be finding and guiding new deals to fruition — a time-intensive process in and of itself. And if exits aren’t forthcoming, VCs may find they have less time to put into new deals while they shepherd their old ones out the door.

image from the MoneyTree Survey