Subtle signs of change

The initial signs of hope in a market are often just the sense that things are swinging in the right direction. This is why measures such as "consumer sentiment" are so important to the outlook of an economy – when people think things are going well, they often do (and because consumers power over 70% of our economy how people are thinking about spending has a pretty material impact on how the economy actually does).

There’s no venture capital equivalent to consumer sentiment (and frankly how could you poll a group of VCs and get them to agree on something anyway) but I feel that things are on the upswing – at least in the world of early-stage investing. Here’s a few factors influencing my thinking:

  • People are talking about when not if the economy is going to pick up. There was a time not so long ago that people wouldn’t even dare to talk about coming out of this downturn at the risk of sounding too optimistic. Now people are actively debating exactly when the recession will be officially over.
  • Companies are looking at their results and seeing that the bottom didn’t really fall out. This is a topic for a full post, but as I look across our portfolio, there are many companies – particularly our more established businesses – that prepared for the worse but didn’t see it. The fourth quarter of 2008 wasn’t so bad for these companies and most had extremely strong first quarters of 2009 as well. And because they were careful with their cash many have never been in as strong a business position.
  • While plenty of VCs got scared to the sidelines, many (including Foundry) are investing consistently through the down market. We’ve all heard the stories about VC’s sitting on the sidelines – many of which are true – but there’s a core group of early stage VCs that have been consistently looking for new investments throughout the downturn and I see more and more VCs jumping back into the market.
  • People are at least talking about the possibility of a tech IPO market. Fred Wilson has a great post up today talking about the possible return of an IPO market for venture backed companies. The NVCA highlighted this topic as well at their annual meeting last week in Boston.
  • I’m seeing better, not worse, business ideas come through our office. There is no question in my mind that the quality of business plans coming across my desk is higher than its been in a while.  Great entrepreneurs know that this is a great time to start a business and they’re doing just that.

As a VC I’m paid to be both optimistic and realistic. In this case I think I’m being both.  Thoughts?

  • Harry DeMott

    I think you are largely right on this one. I'm seeing much of the same. While consumer and advertising facing businesses had a very rough November and December of last year and some of that weakness carried over into 2009 – on the whole good companies are doing well. Some are at plan, some are slightly below, and some are very much ahead. Pretty much where you would expect a portfolio at any given time. your sentiment idea is also very much on target. Things start to get better when expectations are repriced in peoples minds. Yes, there will be an IPO market: but it will be open to better companies with better business models. Fred nails this one. Yes, VC's will fund business models: but only the higher quality models, and probably at a lower price than a year ago. Like all markets, the VC world lives with an equliibrium and co-exists with other financial markets out there. When the equilibrium is upset you get depression, and when it is restored, you get back to normalcy – which is where I think we are now – not too hot – not too cold.

  • Seth, as you know I help startups and early stage companies with sales issues. At the beginning of the year I was pretty sure this would be a year of helping companies fix sales problems and struggle to survive. I've been pleasantly surprised – I'm currently working with four clients, all of whom have hired me to help scale their sales effort as they expand. All very optimistic and taking advantage of the downturn to increase market share as competitors struggle, and providing real value to their customers in reducing costs and increasing opportunities.

  • We hardly noticed a thing. If you go back to September 2008, four of the last eight months were record months for us (Sep inclusive). April was a record. Not just barely so, but by 18% over our previous record.

    • sethlevine

      good to know and exactly what i’m talking about. this was clearly a deep recession, but it didn’t hit our sector as hard as everyone thought it would…

  • Yes.Derek.I feel the same as you are.April was just a record.