With the end of 2009 upon us, I spent the last few days reviewing our activities during the year. The year started better than we had prepared ourselves for. January was not as bad as we had anticipated for our portfolio companies. However, once February rolled in we all knew we were going to have new experiences. Most of our portfolio companies reached bottom late June early July, since late August they’ve been seeing rays of hope, and most are expecting to have a strong yearend.
In October 2008 I had written about my firm’s thoughts on the economy, and the advice we had provided to our portfolio companies on how to survive during the recession. We urged cost-cutting, assessing customer quality and risk, reducing debt when possible, and starting new initiatives only after very careful consideration. The measures our companies took in response to that advice had the intended effect. Our entire portfolio survived. Even the weaker companies lived to fight another day, even if they didn’t grow in the way they had anticipated.
Some business models proved particularly strong and enduring during the recession. For example, I had been reporting throughout the year that, by and large, three categories of companies were beating our expectations: SaaS application companies, branded response e-commerce companies, and performance-based advertising companies. For a few companies from these categories 2009 was a banner year, since they grew by as much as 100% over the past 12 months. The recent crisis also allowed us to assess the quality of our management teams. The more experienced management teams were faster to take the right measures, whereas the less experienced teams required more prodding and handholding. While many of our portfolio companies had to lay off employees during the 1H09, but they also took advantage of the talent available in the market to upgrade their teams (from the rank and file to the executive ranks).
While all portfolio companies survived, the economic conditions of the last 12 months have significantly set back the business plans of some. These companies will require more support than we had originally planned (e.g., more investment than initially planned), and may not be able to begin growing again to have a successful exit. As a result, going forward we will need to be assessing how to allocate capital between these companies and the ones that are performing well and can provide strong returns to the fund.
About ten of our portfolio companies had to raise new rounds
during 2009. Consistent with our advice,
it took them longer to complete these rounds than it would have taken in
“normal” times. But by appropriately
planning for such delays they didn’t have to make drastic changes that could
have spooked their customers and prospects.
Most of these companies were financed successfully and, in some cases,
they closed up rounds. We had to do
inside rounds for only a couple of the companies which gave us the opportunity
to re-assess our conviction for each company.
I should also note that portfolio companies that raised money after June
had an “easier” time, since from July on VCs were actively looking for new
investment opportunities. In fact, since
October the better-performing portfolio companies have been receiving calls
from venture or private equity investors interested in leading pre-emptive
Even during this year we had two strong exits. We sold Arantech and Datatel for very nice multiples in the process delighting our LPs. We were one of the very few firms that provided returns during this difficult year, consistent with what we’ve done every year. Moreover, we view the recent opening of the “IPO window” and the increasing M&A activity benefiting additional portfolio companies. At present, at least half a dozen portfolio companies are involved in relevant discussions.
On a typical year we make 10-12 new investments. During 2009 we completed only three new investments, in two internet companies and one cleantech company. We considered several other opportunities throughout the year. In most cases we didn’t think that the risk-reward profile of these opportunities warranted an investment. In addition, during the first part of the year, the economic turmoil made us feel less certain about what terms to offer, particularly to later stage companies. As I mentioned above, since July we consider that we have entered one of the best investment periods and we are actively looking for new opportunities.
Despite the optimism surrounding the economic recovery, we don't believe that the US economy is out of the woods completely. We are still in the early stages of the economic recovery. Even though during 2010 the IT budgets are expected to improve (2-4% growth) and the online advertising budgets will stabilize and may even grow by as much as 5%, we expect that the US may experience a W-shape recovery rather than a U- or V-shape one. If this proves to be the case, then we wouldn't be surprised to see the IPO window closing again and investments in private companies becoming tough to come by. For this reason, we continue to advise caution to our portfolio companies and to work closely with them as they navigate these uncertain times.