VC Vigilance

Agriculture is not a fad.

That is what I said to the CEO of a company who is applying high tech to crop yield management, and who just landed a healthy round of VC money to grow an already proven business model. Agriculture is not a fad and thus it is a market in which to invest if risk reduction is part of your planning.

VCs are much more risk adverse then they used to be. After the dot com bust many VC partners left the field and started working in the fields themselves (seriously, the number of former VCs who are now vintners is disturbing, and I suspect many are drinking their profits).

I scanned a dozen recently reported VC deals from the Sandhill.com web site. What I wanted to see was if VCs were chasing fads (as they did in the late 1990’s), were following trends (as they have leaned in the early 21st century) or if they were looking for start-ups rooted in the ongoing mechanics of the economy … or what is left of it.

8% of deals were betting on a fad
25% were following trends (mainly web video)
67% we anchored in traditional businesses and biz optimization

This is a rather staggering shift in the investment community, showing that risk is significantly less tolerated than a mere five years ago. It is no secret that lately VCs have waited for start-ups to prove their business model, management team and make some real sales. But after the dot-bomb shake out, they were still heavily investing in the unknown. Bets were placed on companies that demonstrated the three provisions (model, management, sales) but which had highly speculative futures.

Over time VCs added trends to the mix. If an investment partner felt there was a strong trend underlying the business (i.e., social networking, web videos, etc.), then funding was provided. However, VCs know that trends can be fickle – I’m still waiting for the market to ask why people waste time on Twitter.

The glacial shift in VC risk taking has now reached a state one step this side of paranoid. Capital is flowing, albeit more slowly, into technologies that are not fads or trends. We see funds flowing into document management, SAP implementation accelerators, recruiting management, advertising tracking, metro news online, content management, and policy/procedure/audit infrastructure. All established industries or optimization of industries.

Not a single fad in 67% of the deals.

What does this mean for start-ups? It means there are going to be very few speculative investments. If your products or service is breaking new ground, you better planning a bringing your own shovel. You will need to excavate and pour your own foundation before VCs are willing to finance your walls and roof.

On the opposite end, if your wares augment, enhance or redefine well established industries, then VCs will take notice. Take agriculture. Aside from making fire, there isn’t a more fundamental industry. People are fond of eating, and if they weren’t, we wouldn’t be having this conversation. The recent VC investments I noted – document management, local news, advertising – these industries are slightly less universal than food, but not by much.

Which means you’ll get great round-A funding if you can invent better fire.


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