Lesson from 2002: Fund Companies in 2009!

Earlier this year, we all saw the broader stock market hit new scary lows and many were wondering where it would stop.   The overall downturn in the economy prompted us at Trinity to have a broader strategic discussion around our investment strategy.   We wondered internally whether we should pull back and expect to make fewer investments in 2009?   Or, should we pour on the gas and “double down”?  

During this debate, we looked at the investment activity of ten VCs from the last downturn of 2001 – 2003 to see if there were any lessons to be learned.  Here is one of my own takeaways and the data (caveat – this analysis is not scientific, just for discussion purposes):

2002 Was the Best Year To Make “New Investments” During the Last Downturn

After parsing the data, we found that 17 of the 73 (23%) ”new” investments which were made across these ten VCs in 2002 ultimately yielded a $100m + exit in  (vs. 15% in 2001 and 8% in 2003).   73 “new investments” was also clearly a dip in investment rate as one can see in the following chart that shows pre and post ’01-03 downturn # of new investments/year.  2002 was the nadir of that downturn in terms of investment rate, yet yielded the highest rate of winners during that ’01-’03 period.

Broadly speaking, what could this mean for today?  Having worked at a startup (PolyServe) in the Valley during the last downturn, I personally liken 2008 to 2001 (both had cataclysmic events happen in mid September that truly pushed the economy over the brink), 2009 to 2002 (both seem like the real trough year when the economy bottoms out) and 2010 to 2003 (hopefully the year of the start of actual recovery).  So, if we really are in the midst of “2002 all over again”, one should expect VC funding pace to slow down (as it certainly has to mid 1990′s levels) but I’d echo the now well documented sentiment (here and here) with some new concrete data that this is indeed the time to seize the day.  I believe 2009 will be like 2002 and some great new companies will get founded and funded, despite the gloomy macro environment.  I thought I’d share this with the hopes it emboldens the “Iron” spirit in entrepreneurs and investors alike. 

Notes:

• “New Investments” defined as the first time one of the ten VCs funded a company in a given year, regardless of round (e.g. could have been a Series A, B, recap, etc)

 

• Data considered new investments only, publicly disclosed exits, domestic US early stage funds only, and leveraged VentureSource data which has a bit of a time lag to it.
• Thanks to my colleague Patricia Nakache and our intern, Atul Kumar, who assisted in pulling together the data and analysis.