Saturday, 31 May 2008

Taking the temperature

I talk to a lot of entrepreneurs. Guys just starting out. Guys up and running. Guys looking for an exit. The general chatter gives you a good feel for what's going on and who's doing what to who. It's a good way to take the temperature and get a feel for the general health of things from an entrepreneurial perspective. And right now I would say the patient has flu like symptoms, although it may just be a common cold.

This is most noticeable amongst the start up guys looking for early stage funding. I have heard from five or six fellow entrepreneurs in the past fortnight that VC deals that looked promising have fallen away and that private investors have gone to ground. Fund raising advisors are telling me that there is still money out there (they would say that wouldn't they) but even they admit that the money is moving towards later stage deals and is being more agressive on valuations.

I talked earlier in the year about how things might start to slow down this year and I think we are seeing the signs of that coming through now. People will still point to a few headline deals, $10m raised here, £8m raised there, to claim that we've never had it so good, but the chatter on the ground is sending out a different message.

If you are fund raising in this environment, the important thing to do is to qualify quickly. You need to know whether the investor is going to come on board or not. If they are not, you need to give yourself breathing space to sort yourself out, not find out at the last moment that it wasn't going anywhere.

The VCs will want to keep options open. So whilst they will be slow to invest, prefering to watch the market and watch their existing companies for signs of weakness before making a move, they will keep talking. Meetings will take a bit longer to set up. Analysts will spend more time asking random questions that they already know the answer to. You will get lots of positive noises ("we like this space and I'm keen to move forwards" I think means "it's useful to have you on the list of companies that I am talking to otherwise it looks like I'm not doing anything so when the partners decide to trim costs, I might get the chop").

A couple of rules of thumb. In this environment, and I expect it to get tougher from a fund raising perspective, assume it will take you 6 month minimum to raise any money. If you get it done quicker, good for you, but work on the assumption that if you start actively looking on 1st June then perhaps you will get some cash in the bank by 31st October earliest! Secondly, you will need to talk to more investors. Assume 20-30 different investors at least and 3-5 conversations, meetings, pitches each. So you will have perhaps 100 funding related conversations over the next six months to get a deal done. That's a lot of hard work but that's what it takes in this environment.

Also in this environment remember that the only money that counts is the money in your bank account. You hear a lot of talk of "smart money". As an entrepreneur the only thing to remember is that smart money is money sitting in your bank account available for you to use. All other money is plain stupid.

So, fellow entrepreneurs, the market is changing and if you listen carefully you can hear and feel what's going on. You can see it in the early stage investing end of things, so if you need more money this year then you'd better get started now.

The good news though is that just like 2001/02 the fair weather entrepreneurs should be giving up soon and heading back for the "safe" corporate jobs, leaving the field clear for the battle scarred street fighting entrepreneurs amongst us.


William said...

Great post Tom. Bang on the money.

Anonymous said...

I find this to be very much the case as well. There does seem to be plenty of money "out there" but most of the people you talk to are not really active. I think part of it is that it's that "fit" is more tricky, networks are more closed than they appear and yes, people are a little hesitant right now. It's a good time to have funding and a bad time to be needing it. Could stay this way for the year.