Tuesday, August 23, 2005

VC -->Early Stage Comeback

Late-stage deals dominated the second quarter, but I've noticed more early-stage investments in the dealflow in the last couple weeks, but it's always nice to hear someone else say it. I recently talked with Evangelos Simoudis at Trident about investing at different stages. Read the full interview at RHDotCom.

Q. What caused last quarter's strong shift to late-stage?

A. There has been a lot of discussion of the venture funds that invested in the tail end of the Internet [boom] which didn’t do well at all. One of the reasons they didn’t do well was because they invested at high valuations and the companies didn’t go anywhere. Now they have to talk to their institutional investors about their track record, and the track record for early-stage was not very good.

Q. So it’s just face saving?

A. It’s not just face saving, where the investors said, “Oh my God, that didn’t work. Let’s try something else.” If you want to see the whole chain of effects, you have to go back to 2001, when a lot of corporations cut down their budgets, so they were not buying as many wares from the startups.

They had bought a lot of things during the late nineties. Now all of a sudden, they weren’t buying anything. Similarly, consumers curtailed their purchasing. As a result, many companies did not do well at all.

Q. So if the action is in late stage now, does this mean early stage is doomed?

A. Early-stage investing is going to come back. We’re at a much better place now than we were 18 months ago. You routinely hear about early-stage companies getting funding. But more importantly, you’re hearing a lot more about exits. This will whet the appetite again and cause people to return to early-stage investing.


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