Realism creeping into venture capital calculations

The opening party of Boston-based Northbridge Venture Partners' West Coast office in San Mateo, CA could not have come at a more awkward time. With the U.S. stock market sinking fast and rumors of venture capitalists being unable to access funds committed to them, I did not expect the shindig to be a happy affair.

But it was, on the surface at least, with free-flowing wine and sushi, and a crowded new office filled with hopeful entrepreneurs and curious VCs. The giant flat-screen in the conference room was tuned to the Red Sox game, not CNN.

Were the players in the venture game whistling past the graveyard? Fortunately for everyone, the tenor of the VCs was more realistic than enthusiastic.

Northbridge partner Jeffrey Beir told me, "We're going to lose some good companies" in the coming years. New companies with new ideas should still be able to get funding, and mature companies with positive revenue growth (in this economy, that's saying something) will be able to survive, although they may grow more slowly until the markets loosen up. But those in the adolescence of their start-up may not be able to raise the funds necessary to stretch their business development to the time when the economy is more favorable.

For all companies, Beir says the formula for figuring how much additional funding, or "runway" a company needs is simple: "Add two years."

And even then, it's not clear if the "exits" (IPOs or acquisitions) will be providing the windfalls that VCs and many entrepreneurs count on to make their work pay off. Northbridge co-founder Richard D'Amore indicated that he isn't really holding out for the IPO market to re-ignite for 5-year-old (or younger) tech companies, as it did for firms in the first dot-com bubble, and that without IPOs injecting money into companies, even if it's only the large, well-established ones, the M&A market isn't going to be active. IPOs are the direct precursors of M&A, he explained.

Beir said that while in the last bubble "there were some stupid companies," in this economy "there's a level of maturity" among the CEOs. When it comes to cutting back on staff or projects to extend the survival time through this economic trouble, "I'm not getting resistance," Beir said. It's "not like last time, when CEOs were running into walls at 200 miles an hour."

Elsewhere in the halls of Northbridge Venture Partners, there were whispers of new models for the venture business. I heard people talking about funding agreements that put the VCs on the books to take income from the companies they fund. Even without the big exits, funders may still find a way to eek returns out of their investments.

See also:
Tech entrepreneurs changing strategies, not products.
How start-ups can survive.