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RE: Peter Rip’s The Coming Venture Capital Boom

January 2nd, 2009 · No Comments

Completely agree Peter Rip’s blog entry on EarlyStageVC blog.   As an economist by training and entrepreneur advisor and angel investor facilitator by living, I know that great wealth is created in times like these because the strong will survive and there is plenty of money out there that seeks to multiply itself.   There are always ebbs and flows in the capital markets where there are market corrections as the natural order of things.  His basic premise is that with the lessons learned from the dot.com bomb and the economic recovery initiatives, there will be great opportunities for investors and for entrepreneurs in the coming years.   To quote his conclusions:  “As the fire continues to rage in financial markets, it is hard to imagine when Opportunity will reappear. But the truth is when everyone sees Opportunity; they are only seeing the reflection.  True Opportunity appears at the market bottom, not at the top.   It’s times like these that test what you believe in, and I believe in the Business Cycle, Human Creativity, and the stimulative effect of massive Government spending. 2009 and 2010 will be great times to invest to reap the benefits in 2012-2014, for those who can judge both business risk and liquidity risk, and have the courage of their convictions.”   It is the pioneers that create new opportunities and the bold that will invest time and money to make them succeed.   Great Economic Recoveries come from innovation and investment.   It is the story of American Entrepreneurism to embrace that very thing….innovation starts here and as true capitalists, investing in that innovation creates wealth that multiply itself with further economic stimulus.
 
I’m also optimistic about this particular recovery as not being as long because there are a couple of key things that are different in this market from the blood bath following the dot.com meteoric rise.  1.  There was stupid money being thrown at the also-rands that no standard business logic would believe the company would succeed.  I heard Guy Kawasaki talk about this….there was no due diligence or very little of it during the crazy days of the dot.com rise.  If a VC Firm down the street was investing in a pet supply website, you did to, figuring that they had done their due diligence on the market opportunity.  You didn’t want to miss out.  So it was an investing frenzy…because too, there was a known exit with the IPO market  Which leads to my second reason for optimism… The venture capital then was played out and dry powder was gone and it took years for the VCs to gain the trust of their investors to attract capital again.  When a company with a bad business model had to be kept alive because there was no exit, then they had to use what capital they had left to sustain those companies and this ended up not producing great returns to their investors.   The VCs I talk to now were already being conservative with their investments over the last 18 months, still feeling the pain from those days, and they still have plenty of dry powder because they recently raised their funds, and are at the beginning of their investment cycle/fund, not the end.   They’ll sit tight for a few months, but remember they must invest and in order to keep their investors content, they must show some optimism about the opportunities to produce a return.   It simply becomes an easy excuse to really cherry pick the good deals.
 
It is not different with the angel investor market too.   We have seen an increase of investors coming back to our group, either as new members or as a returner to the process of early stage private equity investing.  Many of them had anticipated the market fluctuation in early 2008.  We were very concerned about our SE Private Equity Conference in April 2008 because the market was already in a flux if you recall.   Many of the sophisticated investors (the ones that actually get the value proposition of angel investing) extracted capital from the market then and put it into lower returns, less risky investments.  Now they are cherry picking getting back into the public markets and taking serious looks at early stage investment opportunities because that is where they will get their multiple.   But they are smart and they are pushing for better valuations.  They know their money is worth more in this type of market and they are maximizing the value of it.   They are investing, so we will see the ripple effect of this as these companies become better prepared and more attractive to VCs over the next 12-18 months. 

I’m glad Peter Rip stepped out of the shadows and the nay-sayers that want see only doom and gloom.   We are optimistic and for good reason.   Great wealth will be created in 2009 for those who are willing to recognize the opportunities.
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