VCs Say the Worst Is Over

A bit of cheer has emerged on the venture capital front: According to a recent survey conducted by consultancy Deloitte & Touche LLP, VCs on both coasts of the U.S. are starting to feel better about loosening up the purse strings and investing in startups again.

While not entirely lifting the fog of economic gloom, D&T's survey of approximately 1,200 venture capitalists found that nearly 90 percent of the respondents believe it's OK to start investing in technology startups again, while nearly 93 percent think that M&A activity will also stabilize or even pick up, a small sign of hope for the moribund tech industry.

"We see certainly an upturn, albeit from a pretty gloomy time," says Will Frame, a managing director with D&T's corporate finance services division. According to Frame, poll respondents say the hard, startup-killing, portfolio-management decisions have mostly been taken already, leaving VCs free to look to the future.

"The individual VCs say they are looking for new deals, and that's good news," Frame says.

Of course, the optical and storage segments have retained their afficionados, even through the overall decline in venture activity. While not at the pace of earlier boom levels, it's still not uncommon for $100 million deals to get done, like the recent rounds snared by Santera Systems Inc. and 3PARdata Inc. (see Investors Stand By Santera and 3PARdata Snags $100M).

Optical stalwart Morgenthaler Ventures just closed a new $850 million fund, a third of which is earmarked for optical concerns (see Morgenthaler Doubles Down). And stealthy storage startups, like Intransa, are attracting old-line networking pros like Eric Benhamou (see Eric the Intransa Gent), along with their startup dough.

Indeed, some think the storage sector in particular may be heading toward overfunding (see Venture Capital Survey), like the optical systems and components fields before it. So, there's still some weeding out ahead before a new crop of startups can reach full bloom.

Though the D&T survey says that only 37 percent of the VC respondents expect further declines in exit valuations, 72 percent said that follow-on rounds are still likely to decline in the next half-year, with many more startups -- and even some VC firms -- falling by the wayside.

"I think you'll see some of the newer [VC] funds ceasing operations," says Frame. "Especially the ones who came into being the last few years, and not firms with a lengthy track record. We're seeing a return to some of the traditional VC values, helping to build long-term businesses, and generate real value for customers."

D&T surveyed 1,200 individual VCs on both the east and west U.S. coasts, between June 1 and July 31, with 200 respondents from Silicon Valley alone, according to Frame, who says a follow-up survey will be conducted in the fourth quarter.

- Paul Kapustka, Editor at Large, Light Reading

kenyon 12/4/2012 | 7:52:29 PM
re: VCs Say the Worst Is Over If the VCs are so high on investing at this stage, where's the evidence?

I've talked with a few *good*, experienced VCs, and they are out looking for good first round opportunities, but if you are a promising company looking for second round funding, good luck. The majority of VCs are running scared, afraid to put real money in those opportunities.

Most of the 2nd and 3rd round announcements you read about these days are, as has been pointed out in the case of Santera, are good money chasing bad.

You don't have to look too closely to notice that the VC community isn't taking its own advice. And while I certainly don't expect them to be throwing money around like they were a year or more ago, I would hope they learned a few lessons about due dilligence.

If it's such a good time to invest, invest.
prettygirl 12/4/2012 | 7:52:32 PM
re: VCs Say the Worst Is Over Don't waste time here, see your doctor for your sick mind! Don't wait so long!
santeralost 12/4/2012 | 7:52:52 PM
re: VCs Say the Worst Is Over Austin Ventures, Institutional Venture Partners, Meritech Capital Partners, Sequoia Capital, and Trinity Ventures have all made "snake oil" investments in Santera.

So far, Santera has been DOA in its friendly option rich accounts. These VCs better be banking on African magic to recover the cash Santera is quickly sacrificing.

Santera is derived from the Spanish word santo and means the worship of saints.

Interesting that ancient religious beliefs of slaves brought to the Caribbean islands from the Yorubas of West Africa originated Santera to appease Catholic missionaries and continue worship of Orishas or divine energies of nature.

The VCs will need all the prayers and magic they can conjure up to break even on Santera.
jim_smith 12/4/2012 | 7:55:29 PM
re: VCs Say the Worst Is Over I think the startups that the VCs wanted to kill
have been killed. The VCs have placed their bets.
Now its up to the employees and the market to
kill the remaining startups.

But more interesting than startup killing is
the VC-killing that is going to happen in
the next two years. It will be nice if LR
publish a list of all the snake-oil-VCs aka
"losers" so that the next time we have a boom,
we can stay away from these guys. Unfortunately
there will be a new crop of loser VCs.

A report on VC-killings will be interesting.
ownstock 12/4/2012 | 7:55:35 PM
re: VCs Say the Worst Is Over It's really worse (or better) than that: they have to continue to invest, or get another job. Their income is partly based on the income from old investments already IPO'd, some from cash on the sidelines in money market, and the rest comes from placing new money. Now is not a good time to sell stock, and sideline money is "dead money", so they got to invest or die...

Now really is a good time for VCs to invest: they've got a crappy market to use as an excuse to give the poor entrepeneur a "first round haircut" Heck, why risk waiting for later rounds? After all, the companies they typically invest in may not last to later rounds, and they might miss their fun!

Anyone else noticed the uptick in rebirth of (fromerly) crappy investments under new names these days?

Humm...Zapton, Blue Leaf, I think we've got the makings for an interesting article here Peter...

Recycled snake oil anyone?
Brattain 12/4/2012 | 7:55:47 PM
re: VCs Say the Worst Is Over The title of this article should say:
"Snake oil salesmen say it's OK to
buy snake oil again!"

Big surprise. VC's saying its OK to invest
in technology again. Duh, what else are
they going to say. Without investor dollars,
they have nothing to do.

"poll respondents say the hard, startup-killing,
portfolio-management decisions have mostly been taken already"

What? You've got to be kidding.
How many optical networking startups still
exist? how many are still out there making identical metro boxes? 15? 20?
The "startup-killing" has hardly begun.
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