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?