VCs to Entrepreneurs: Seed-Stage Startups OK. Others? Not So Much

Just for fun tonight, and hoping to view a potentially entertaining mass freakout over the market, I decided to attend one of those ubiquitous Silicon Valley panels where entrepreneurs can ask venture capitalists questions. Nobody broke down or waved dangerous weapons or anything at the VC Connect event held in Palo Alto and hosted by VC Taskforce, a group that brings together entrepreneurs and VCs in a series of regular events. But I noticed that, even before the event started, more people than usual were happy to partake of the wine, even one of the VC panelists.

Anyway, given the ugly turn of the markets lately, not to mention news of grim meetings by VCs with their portfolios companies and scary emails by angel investors, I was surprised VCs weren’t even more bearish than they sounded. All of them said they don’t plan to slow their pace of investing. I’m not sure I believe them, especially if the market continues tanking, but venture capital is funny that way. I mean, even the rather muted returns of venture investments in recent years now must look appealing to institutional and other investors next to the train wreck that is conventional stocks.

In particular, the VCs were surprisingly positive about the prospects for very early-stage startups, which after all don't have to worry about paying customers for a little while.

"I'm very bullish about the seed stage," said Jorge Calderon of Launch Capital, a new, small VC firm in Palo Alto that has funded eight companies so far this year, including two consumer Web firms. Why? "There's going to be a lot of new talent" to hire, he said.

"That's a very gentle way of saying there's going to be a lot of people out of work," shot back the moderator, Bill Reichert of early-stage VC Garage Technology Ventures.

"There's going to be a lot of smart people out of work," replied Calderon with a smile. But the news isn't all good, he said (as if layoffs are good news). "You gotta hunker down and be very efficient with your dollars," because it's unclear when the next funding will come, if ever.

One downside for early-stage companies, however, is that later-stage companies will have to change course to focus on revenue more than simply growth, and that's going to draw the full attention of many VCs, who simply won't have time to look at many new ventures for at least the next six months.

What's more, entrepreneurs who hope to get money from angel investors will have a tougher time, said Ed Esber of the small Halo Fund. Esber, who is also part of the Angels' Forum, a group of angel investors, said some of them are starting to refuse to write more checks for investments until their portfolios improve--and that could be a good, long while. "Angel money is very, very tight right now," he said.

But the challenges of newly minted startups will pale next to those later-stage ones, especially those ready to go to market. "The biggest problem in the next 12 to 18 months is if you expect your customer to write a check," said Saurabh Srivastava of Artiman Ventures. which manages $350 million in two funds. "You're in for some pain."

All that said, the VCs said that for savvy entrepreneurs with good ideas, these are potentially the best of times. "In bad times, the accidental entrepreneurs leave," said Srivastava. "Some of the best companies are born in times of stress."

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