There is an uneasy feeling afoot in certain corners of the venture capital industry. While some geographies are seeing oodles of deal flow (even if much of it is whimsical and suspect), many areas are seeing virtually nothing, especially in information technology, the former stalwart of venture investing. Five years after the dot-com boom and some IT venture investors don’t know to make of the problem.
You see some of this in comments by Mark Skapinker, a founder of Delrina (the WinFax people), and a current managing director at Brightspark Capital, a Toronto-based venture firm. He says “…the new venture marketplace is in a crisis”. While Skapinker is admittedly talking about Ontario and implying that things are better elsewhere, most everywhere else venture investors are complaining too — and imagining that things are better somewhere else.
There is no doubt that the world of IT investing has changed. If, for example, you’re most comfortable creating enterprise applications (CRM and that sort of thing) and the like that you sell to the IT department, then you’re a guy investing in umbrella companies in a newly desiccated landscape. There just isn’t as much call for it (i.e., none) as there once was.
What to do? You can do one (or more) of five things as a venture investor:
- You can close the fund. No-one does this. Some should, but none do.
- You can change sectors. This is a fine idea, the sort of sensible thing that a venture fund would suggest to a struggling portfolio company, but the trouble is that venture investors people hate leaving their comfort zone. That’s why you find IT guys turned life science investors who see everything as a platform genomics play, or IT guys in the gaming world who only want to sell billing systems.
- You can go upstream. If you don’t see the deals you want, then originate more deals. Climb deeper into IP. Shape deals. Many firms talk this game, but most don’t do it, can’t do it, and won’t do it. They much prefer meetings where they get to talk about how the venture investing process works, to meetings where they talk (knowledgeably and helpfully) about deep IP.
- You can dump the partner. That is a sensible thing to do, but most firms won’t do it. I can count on one hand all the name-brand funds that have dumped senior partners who no longer had the right skill set, and couldn’t adapt to a new landscape.
- You can keep soldiering on looking for traditional deals, hoping that either contrarianism or sticktoitiveness will eventally pay off.
Can you guess which options most funds choose? I thought you could.