"The depth of this pessimism is rather surprising, considering that 12 months ago the public market had already declined, technology stocks had plummeted, dot-com failures were rampant and IPOs were nearly non-existent," says Dee Power, co-founder of Profit Dynamics Inc., and head of a team that conducted a nationwide survey of more than 80 venture capital firms.
The survey revealed that an overwhelming 81 percent of VCs rate the current environment as worse or much worse than the previous 12 months. Only 11 percent of those polled believe the environment is about the same, and a scant 8 percent say they see the landscape as improved.
Power says there are several reasons for why VCs take this negative viewpoint beyond the grim fact that their portfolios are bleeding from unwise dot-com investments. Among those cited:
* They are focused on their current portfolio of companies and don't have the time or resources to investigate new companies;
* The economy has had a dampening effect on any new investments; and
* There are little or no exit strategies available for current investments.
Overall, it's a dark picture for the finance industry these days, unless of course you're involved with mergers and acquisitions in the distressed business market. According to Mark Heesen, president of the National Venture Capital Association, the bulk of investment liquidity is coming from the mergers and acquisitions market. And for firms such as McDonald Investments and Brown, Gibbons, Lang & Co. L.P., business is actually pretty good. Both companies have been busy lately in the M&A market with distressed firms.
But all's not rosy for those business owners looking for cash infusions rather than buyers. As proof you need look no further than the third quarter of 2001, where nine Ohio companies raised a paltry $39 million from venture capitalists. Nationwide, there was a total of $8 billion invested during the third quarter.
It's a far cry from the previous year, when during the third quarter of 2000, 19 deals totaling nearly $300 million were financed. Ironically, last year seems like the distant past.
So how can your business weather the rocky waters and find capital for an expansion or new product?
It's rough, but if you play your cards right money is available. Make sure your proposal includes the following:
High growth rate With today's economic conditions, venture capital groups look for projected annual sales growth of 25 percent or more if your company is either launching a new product line or expanding into a new marketplace.
Clear strategy for commercialization Just because your business currently is successful with its sales and marketing approach doesn't mean you can simply duplicate the formula. However, if your market research backs up the contention that you can, show it. If not, develop a strong strategic plan.
Barriers to entry Be sure to show potential capital sources that your company can discourage competition in the new market you're entering. It can be as simple as being several year ahead of any competitors or as complicated as a trade secret, patented product or proprietary process.
And, if all else fails, look to your traditional banker.