With the U.S. economy bouncing around chaotically, VC-backed companies are in a unique position: Until they become cash-flow positive, they're dependent on the support of their investors for additional financing.
I recently heard some remarkable rumors and innuendos about how software and internet investing was finished as the VC firms stopped investing. I expect these assertions were triggered by the now infamous "RIP: Good Times" presentation from Sequoia Capital in October. A number of people I've talked to concluded that a bunch of VC firms were going to simply go out of business.
I heard this type of talk a mere seven years ago. After the dotcom bubble popped, there were endless predictions of doom for the software/internet industry and the venture capitalists that supported it. The broader predictions of VC extinction didn't happen, and my firm made some of its best investments between 2000 and 2004.
As an entrepreneur, you probably don't care as much about the overall VC industry as you care about your VC investors. So while the noise might be intellectually interesting, you're asking, "How does it affect me?"
To find out, ask your venture capitalists these important questions:
- What year (vintage) is your fund? Almost all VC funds are set up as 10-year partnerships that can be extended several years. They usually spend their first three to five years investing in new companies and the balance of the partnership managing those investments.
- Have you raised a new fund since you invested in our company? The long-term health of a VC firm can be measured by how recently it has raised a new fund. Optimally, a VC firm raises a new fund every three to five years, so it's always actively investing in companies.
- When are you planning to raise a new fund? If the answer to this question is sketchy, pay attention. It usually takes at least a year to raise a new fund unless your VC firm is well-established with a long history.
As a key business partner, your VC firm should be open and direct with you about these questions. If the firm has raised a new fund since 2004, you probably have nothing to worry about. If its last fund was raised between 2001 and 2003, you should press the firm about its fundraising plans. If its last fund was raised before 2001, you should be mildly concerned, as it may have difficulty raising another fund. While there are no right answers, the level of clarity you get from your investors is important.
If a VC firm can't or won't raise another fund, it will likely still be in business for many years as it manages its existing portfolio, although its level of activity and involvement will decline as time passes. As with many things in life, the cliché applies: VC firms rarely die--they just fade away.Brad Feld has been an early-stage investor and entrepreneur for more than 20 years. He is a co-founder of Foundry Group, an early-stage VC firm. Brad blogs at feld.com and askthevc.com, runs marathons and lives with his wife and two golden retrievers in Boulder, Colorado, and Homer, Alaska.