Food for thought from Fred Destin

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Fred Destin, possibly the quintessential European VC (a Belgian living in Switzerland but traveling Europe looking for startups), has a must-read post on his blog about “the funding drought”. Here are a few highlights (quite a few, actually, since it’s so good):

Don’t believe the hype. Yes, it’s a nice environment to be starting the winners of tomorrow and seed funding has not dried up. And yes, Wellington and friends feel Spotify is the [Google][Apple] of media and pay (supposedly) €200m pre for the privilege of working with the excellent Messieurs Ek and Lorentzon. But do not let these facts distract you, for most companies are facing a period of extended drought.

– Many funds are either failing to raise or are deciding to postpone their fundraising. Hence they have to live for longer with the cash at hand. That means reduced investment pace and a generally defensive stance.

– Companies are needing more cash. Even late stage “safe” businesses suddenly revert to spending hundreds of thousands a month as they grapple with a tough economy and expansion plans gone wrong. Exits are few and far between and the alternative sources of finance have dried up.

– Most funds were under-reserved for this crisis. In other words, the ratio of reserves held back versus capital invested was too low. Now, as you decide to hold back say $2 per $1 invested, all of a sudden cash planning shows a massive gap. The result is ruthless portfolio triage and weakened syndicates.

– Lack of visibility on when this crisis ends and when liquidity returns blocks decision-making and risk-taking

We seem to be turning a corner and the worst may well be behind us, with some new fund initiatives such as Birch/Hoberman’s ProFounders or the Boyz at Atomico. But this will not solve the funding crunch fast. For most companies out there in the “grey zone” (worthy but not obviously hot), it’s tough and it’s going to remain that way.

Go here for the full post. What do you think? Is Destin being too pessimistic?

  • http://uk.techcrunch.com/2009/08/12/spotifys-latest-hook-up-absolute-radio-and-shortlist-magazine/ Spotify’s latest hook-up: Absolute Radio and ShortList magazine

    […] mobile apps, global roll-outs and the appointment we heard about yesterday? It certainly seems – notwithstanding what Fred Destin said recently – that Spotify is emerging as a major power in online […]

  • http://www.newsjacker.co.uk/media/spotify%e2%80%99s-latest-hook-up-absolute-radio-and-shortlist-magazine/ Spotify’s latest hook-up: Absolute Radio and ShortList magazine 

    […] apps, global roll-outs and the appointment we heard about yesterday? It certainly seems – notwithstanding what Fred Destin said recently – that Spotify is emerging as a major power in online […]

  • http://www.newscred.com Shafqat

    As usual, Fred is spot on with his analysis. Despite the fairly un-optimistic outlook, I think he brings a good deal of reality to the table. I especially think his comment about the “gray zone” startups to be very true – you can’t expect to get funded by the top tier VCs if you don’t bring a top tier product (i.e. if you want to play with the big dogs, you can’t piss like a puppy).

    I would add one point to the post – companies, even in the gray zone, that are revenue generating and hopefully cashflow positive are in a distinctly better position to raise VC. This has always been true, but seems to be even more important during these times. The Spotifys of the world can raise massive VC without a proven business model, but for the rest, demonstrating cashflow can go along way towards getting you the VC dollars you need.

  • http://uk.techcrunch.com/2009/08/13/vodafone-chucks-e150k-at-european-mobile-internet-startups/ Vodafone chucks €150k at European mobile internet startups

    […] the European funding drought we’ve been hearing about, it would be great to see more big companies reward innovation with […]

  • http://www.newsjacker.co.uk/media/vodafone-chucks-e150k-at-european-mobile-internet-startups/ Vodafone chucks €150k at European mobile internet startups 

    […] the European funding drought we’ve been hearing about, it would be great to see more big companies reward innovation with […]

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