Time To Rethink ‘Walking Dead’ VC Firms?

17 Dec

Recently, an entrepreneur I once worked with reached out to me for advice on raising his next round. During the conversation, he rattled off the names of a half-dozen or so venture firms that he was in discussions with. Evidently, these discussions were not progressing as well as had been hoped. I suggested two more firms particularly focused on his space that he should be speaking with. Upon hearing the firm names the entrepreneur responded that he had already dismissed the idea of approaching one of the firms because it had appeared on a list of “Walking Dead VC” firms on a VC/tech-focused blog. I was startled at the entrepreneur’s haste at dismissing the firm and his willingness to so quickly accept as gospel what he read on a blog without further investigation. This was particularly unsettling given the entrepreneur’s company hung in the balance. This got me to thinking…

Over the last few months I have seen various reports in the trade media about ‘Walking Dead’ VC firms and the apparent parlor game going on in some quarters about handicapping which funds will successfully raise a follow-on vehicle in the future and which firms will likely shut their doors. I understand the schadenfreude behind some of these exercises but I think it has reached a pitch that is troubling, possibly damaging, and certainly counter productive.

To be sure, the venture industry is going through challenging times. Some recognized firms are being wound down and more will undoubtedly follow. [I have written on this subject extensively and even called it a 2010 trend to watch earlier this year.] There are those that argue that this winnowing of firms is long overdue. There are others that posit that venture capital has been over funded for some time and that this is simply a Darwinian process that must occur so that the industry can emerge more healthy and so that limited partners can see regular distributions and more stable returns again. For the most part, I have no argument with any of that.  

What troubles me is the idea that there exists some sort of demarcation line between healthy firms that will successfully raise follow-on vehicles and those that will not. I have even heard one observer posit that if a venture firm has not raised a vehicle in the post-2008 financial crisis era, it is as good as doomed. This is nonsense. There are many firms with funds raised pre-2008 that have plenty of dry powder to make investments (both new and follow-on) and plenty of time to shore up their respective funds’ performance–that is, assuming that performance needs shoring up–in order to raise follow-on vehicles. These are hardly ‘walking dead’ firms. Indeed, one could make the argument that firms like these are precisely the firms most likely to be actively looking for new opportunities.

Unless a firm has publicly announced that it is winding down, it is better to avoid labeling a fund as “walking dead.” Tagging a fund in this way has consequences.  As in the case above, it can impact deal flow as companies seeking funding may think twice about approaching a firm believed to be in that category. It can hurt a firm’s prospects of being invited into syndicates and even potentially damage a firm’s existing syndicates. It can jeopardize relationships with current and prospective LPs if a forthcoming fund is even a notion among the firm’s GPs. Finally, and perhaps most troubling of all, it can even damage the prospects of portfolio companies backed by these supposed walking dead VCs.  

These same sentiments apply to start-up companies as well. Talk in the press of start-ups ‘circling the drain’ are often poorly reasoned and based upon shaky anecdotes and innuendo. Venture firms, like start-ups, can go through rocky patches only to emerge stronger and more successful than ever.

There exist many examples of firms thought by some to be ‘walking dead’ that went on to enjoy big exits and raised follow-on vehicles. It’s startling what one big exit can do. One significant success can reverse the fortunes of a moribund fund almost overnight. I’ve seen it many times.

It’s an old cliché that a rumor is often just a premature fact. However, the appearance of problems often brings about precisely those problems. The mere mention of troubles at a certain firm can too often become a self-fulfilling prophecy. Once the proverbial blood is in the water, things begin to take place that can hasten the demise of a firm that might have otherwise recovered from its challenges. Rumors have consequences. Ask Bear Stearns or Lehman Brothers.

Water cooler conversations have their place, but I prefer never to count anyone out until the lights go dark and they start selling off the furniture. Until then, it’s anyone’s game and it’s better to wish them well than predict fume dates and pink slips. The venture business is challenging enough.

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One Response to “Time To Rethink ‘Walking Dead’ VC Firms?”

  1. Chris Piedmonte December 22, 2010 at 6:53 am #

    Good post, Jonathan. I recently had a conversation with a VC friend of mine that told me several years ago that they intended to wind their firm down and that they actually were one of these “walking dead” VC firms. Now in 2010, they’ve had several successful exits from their portfolio and are aggressively raising a new fund to do early stage work. Clearly, this supports your claim that “it ain’t over until it’s over” and that no one should be counted out until they actually are out.

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