Neis: VC expert says financial crisis may trim venture firms
By Brian E. Clark
The economic crisis currently swamping the country will probably slow down venture capitalists and the companies they back in the next year or two, John Neis, managing partner of Madison-based Venture Investors said Tuesday.
But Neis, whose firm has more than $200 million under management, said the impact of the meltdown on Wall Street shouldn't have an immediate effect.
His company, which also has an office in Ann Arbor, Mich., invests primarily in Midwest health care and technology start-ups.
“I think this will have an impact ... especially if this downturn is prolonged,” he said. “Things move in long-term cycles in the venture industry and the events of a few weeks aren’t going to determine it one way or another.
“But it will be a challenging time to raise a new venture capital fund over the course of the next year simply because of the tightening that is occurring,” he said, predicting that fewer companies will go public in the short-term.
The drastic drop in the stock market may also prompt some institutional investors to scale back commitments to new venture funds, he said. And while that won’t hurt existing VC funds, it could hurt money-raising efforts in 2009 and 2010.
“It won’t have an impact on capital availability today,” he said. “And new investments will get made, though people will carefully consider availability of follow-on financing and how much capital it will take to get to the “end game.”
He also said many venture firms are looking back at what happened earlier this decade and asking themselves: “Do we have sufficient reserves for our existing portfolio ... and put more dollars in per deal to take them further down the development path?”
Neis said many of the companies in which Venture Investors is investing are “pre-revenue,” which means they have yet to make any money.
“They are in a development phase, so obviously this isn’t immediately impacting their research and development efforts for the cash they have under management,” he said.
Neis said some sectors, such as health care, won’t be hit as hard by the economic downturn.
“The market will be there,” he said.
“And in some respects, history has shown this is a really good time to be investing,” he said. “Because money becomes a little more scarce, it does impact valuations somewhat and that usually translates into better returns in the long haul.”
Neis said companies that are bringing “game-changing products to market” will fare better than others that consumers can do without.
“If it’s just a ‘nice-to-have’ thing, then people might say ‘gee, that will add value, but it is a decision we can defer,’” he said, making it tougher for some companies in the current environment.
But when it come to health care, he said patients will not say, “I’m going to put off that cancer treatment because I think the economy is a little soft right now.
“Health care demands will be there and so will the dollars to support that, though there will be a tightening just because of the overall impact on capital availability,” he said.
Neis also said so-called angel investors, wealthy individuals who fund nascent companies, may also pull back if they are getting hammered by market losses.
“Institutional investors tend to be disciplined,” he said. “But with angels, it’s their money. They may not feel as wealthy as they (once) did.”
Neis also praised Congress for passing the bailout bill last week in an attempt to calm the markets.
“Clearly, something had to be done to free up liquidity once again,” he said. “The financial system was having the equivalent of congestive heart failure. Only time will tell.”