Venture Capital What Are VC's Looking For in Today's Economic Climate? | What Are VC's Looking For in Today's Economic Climate? |
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The recent drop in the stock market has also had a ripple effect on many other economic areas, including the amount of money available for venture capital. Much of venture firms’ capital comes from institutions such as pension funds, university endowments, and foundations and these institutional investors often have restrictions on the percentage of money that can be used for investments in venture capital, which is often considered riskier than other types of assets. The effect of the current market on individual funds depends in large part on where they are in their investment cycle, according John Martinson, managing partner in Edison Venture Fund, located in Lawrenceville. The third quarter MoneyTree Report stated, “Despite the turmoil in the global financial markets, US venture capital investing remained within historical norms in the third quarter of 2008. Venture capitalists invested $7.1 billion in 907 deals … Third quarter investment activity was down seven percent from the second quarter of 2008 when $7.7 billion was invested in 1,033 deals and down nine percent compared to funding the same time last year.”
Capital to Invest “The current economic situation does narrow the suppliers of money,” says Martinson. “Funds who have capital built up have more resources right now than those that are at the start of a fund-raising cycle.” The Edison Fund is “mid-way through its cycle,” he added, and has capital to invest. The fund does not need to raise funds until “about the middle of next year,” by which time he thinks many investors will be in a better position and the country will be in a better position. As the founder and managing partner of the Edison Fund, Martinson shapes the overall investment strategy of the organization. He also mentors rising investment professionals and assists the general partners in growing their regional and industry practices. Martinson is active in leading Edison’s investments in information technology companies serving the pharmaceutical industry and education and also coordinates the Edison Director Network which consists of 90 successful executives who serve on the board of directors of Edison investments. Martinson established the Edison Venture Fund in 1986, after working for several years with venture capital firms on the West Coast. “I decided there were just as many excellent start-up companies and opportunities back here at home,” he says, explaining his decision to return to the East Coast. His commitment to the mid-Atlantic region has paid off. The Edison Fund has financed more companies in New Jersey, Pennsylvania, Maryland, and Virginia than any other private equity firm. The fund has raised six partnerships totaling $650 million and Martinson himself has organized 150 equity financings and has served on the board of directors of 40 companies. High return investments include Axent, Best Software, Dendrite, Marcam, Mathsoft and POMS.
What Investors Want to See The Edison Fund specializes in financial technology, pharmaceutical business solutions, communications, business services and applications software. But the investors at Edison, like all venture capital investors, have specific criteria they look at when choosing a company in which to invest. The current economic downturn does not mean that money is not available for entrepreneurs, but it does affect those criteria, says Martinson. “It is safe to assume that growth will be slower right now,” says Martinson, which affects how he looks at the businesses he wants to invest in. Companies with “a reoccurring revenue model, as opposed to a model that pays once” are very attractive to many investors right now. Some of the characteristics that he is looking for in an investment are:
More Than Just a Funding Source The Edison Fund brings more than funding to the entrepreneurs it works with. “At the Edison Fund we see our role as more than just providing a source of funding. We provide experience and guidance, also,” says Martinson. “The dramatic growth sought by young technology companies requires the sound advice our professionals can provide in a variety of areas such as fund raising, marketing, sales, planning, organization development and exit transactions.” The fund’s Edison Director Network of “proven leaders” are interested in sharing their experiences with new entrepreneurs. The executives and the companies they work with are matched based on market knowledge, functional specialty, geographic convenience and personal chemistry, explains Martinson.
Importance of Exit Strategy “Exiting is a crucial function in the venture capital process,” says Martinson. The fund works closely with the CEO, CFO, founders, directors and major shareholders to set long term targets, and review and revise every six months. Martinson says the fund’s investors “anticipate a three to nine year holding period with a typical goal of growing from approximately $5 million in revenue at the time of the initial investment to $25 to $100 million in revenue at the exit.” The fund has completed 16 IPOs and 85 company sales. Martinson’s final advice to entrepreneurs anxious about starting a business in this economic climate is to look at it as just one more challenge. “Some of our best investments were started during periods when the economy was weak. The challenges are compelling, the business model is leaner, and many companies that come through this period will be poised for success.”
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