Dear VCs, You Were Wrong


At the end of September 2008, we surveyed venture capitalists about what the financial crisis would ultimately mean to their business. Just to put that moment of history into context, it was about a week after Lehman Brothers declared bankruptcy and about three weeks before Sequoia Capital gave its “RIP Good Times” presentation.

In short, the predictions were juuuust a bit outside.

If you’re a VCJ subscriber, you can read the full survey report here.

At the time, more than 80% of the investors we surveyed said they didn’t think the Wall Street meltdown would cause them to slow their current investment pace. Some 16% planned to actually increase their rate of investment. This seems like a real forehead smacker in hindsight, as dollars committed fell 37% during 2009, according to data from the NVCA.

What’s worse, the investments that did get done came in at lower valuations than their last rounds. The majority of deals done during 2009 came in either at flat valuations or as down rounds, according to data from Fenwick & West. But, at the time, investors predicted that just 24% of their companies would see a lower valuation in their next round.

Investors were optimistic that cleantech would ride out the economic turmoil, even if other sectors took a hit. “Our cleantech sector is looking a bit counter-cyclical, which may make our story a bit different than what you might hear from other sectors,” investor Rob Day said at the time. It was a sentiment echoed by another survey participant as well: “…this really only affects a few of our portfolio companies. We invest across industries and think our industrial and health care companies will feel less of an impact than our IT portfolio companies.”

So how about that cleantech? Financing dollars for the sector fell by nearly half from 2008 to 2009. It ended up being one of the worst-affected areas due to its reliance on large financing syndicates and debt.

To be fair, some venture capitalists we surveyed nailed it. “Some venture funds now raising new funds are having a tough go at it,” said Sherrill Neff, a managing partner at Quaker BioVentures. “Many pension funds and other institutional investors have cut back venture allocations substantially or pulled out of the sector entirely. There’s a lot of uncertainty out there on follow-on funds.”

No joke. Limited partners put out 45% fewer dollars in 2009 than in 2008, according to data from Thomson Reuters.

So what’s going on here? Venture capitalists were systematically too optimistic that the problems on Wall Street wouldn’t reach as far as Sand Hill Road. What’s your take?

  1. Venture capital attracts the optimistic sort, the kind of people who always seem to believe that tomorrow will be a better, brighter day.
  2. Venture capitalists were engaged in a form of “magical thinking” to turn their hope that the downturn would not be bad into a reality.
  3. Venture capitalists wished to signal to entrepreneurs and limited partners that they were unshaken by the events on Wall Street, hoping to derive some gain from appearing stable in the turmoil.
  4. Venture capitalists aren’t good at predicting the future. After all, most of their companies are losers and the majority of funds have lost money during the past decade.
  5. Venture capitalists don’t understand how macroeconomic trends affect their business or are unable to extrapolate their anecdotal experiences to a full market perspective.