(Editor’s note: Terry Opdendyk is the founder of ONSET Ventures. He submitted this look at the state of the VC market to VentureBeat.)
Twenty-six years ago, we founded ONSET Ventures during one of the worst economic periods since the Great Depression. The firm’s strategy was to proactively handcraft startup investments that leveraged the rare, simultaneous occurrence of two economic events – sudden market transformations and hard economic times.
Today, those planets are aligning again – in two major sectors of today’s economy.
Business-to-business companies that can offer their customers an immediate and significant reduction in their pain tend to thrive during recessions. They often turn in growth rates of 50 to 100 percent per year, particularly in the worst of times (such as today). If you can do that in transformative markets, where accelerated creative destruction is threatening to topple entire industries, you have investment opportunities that occur only a few times each generation.
That time is now. In information technology, for example, business models that are based upon hardware, software and communications are rapidly crumbling. Software and communications are becoming free – and I believe hardware is not far behind. In the future, monetizable value will rest primarily in data.
If a startup can craft a business model that helps companies survive and thrive in the face of this profound transformation, that startup can essentially write its own ticket.
The other ripe area is in medical technology – particularly technology that can provide immediate relief to the challenged health care industry. While it is important to continue to invest in new technologies that offer improved treatments and outcomes, new businesses that yield substantial simplifications and cost reductions in health care will be the big wins for investors in today’s environment.
This could be good news for the limited partners who invest in VC funds. Until several years ago, venture capital was essentially self-funding – distributions to LPs in any given year exceeded new capital requests. But with the dramatic fall-off in startup IPOs during the last decade (and now the current financial crisis), investors have found themselves faced with capital calls each year that have exceeded their annual returns, putting them in a liquidity squeeze themselves. This rare window could provide some much-needed relief.
History provides some of the strongest evidence that the confluence of transformative markets and hard times is an important one. Apple Computer, Cisco, Intel and Microsoft were all born in, or on the heels of, significant economic downturn. And all were the agents of – or the immediate beneficiaries of – wildly transformative markets.
The same business principles hold for the companies we are investing in today and the foundation for a whole host of winning startups.
It’s not easy to craft the right investment, particularly when cash is scarce. But for those who can gain traction, the rewards are substantial. This is one of the most transformative periods of the last 25 years.