Attracting Venture Capital in 2008

The founder of Rembrandt Venture Partners offers predictions for next year and advice for entrepreneurs seeking funding

by Karen E. Klein

What's on the horizon for venture capital investing? The founder of one Menlo Park (Calif.) firm predicts conflicting trends in 2008: the demise of a number of VC firms and healthy growth for others, especially those focused on the high-tech, biotech, and green-tech sectors. The founders of Rembrandt Venture Partners focus on early-stage companies with unique propositions and significant "unfair advantage" over their competition. General partner Richard Ling spoke to Smart Answers columnist Karen E. Klein recently about the future and how entrepreneurs might go about capturing his attention. Edited excerpts of their conversation follow.

Your firm has been around since 2004, you've invested in 19 companies, and you've returned all the capital from your initial fund. So you guys are doing well. But what do you see happening on the broader venture capital landscape in 2008?

We think there's going to be continued shrinkage of VC funds out there. A lot of them started in the late '90s, and they popped up solely to take advantage of the Internet bubble. Since the average VC signs 10-year contracts with its investing partners, many of them are reaching that deadline now. They will have difficulty raising new money if they haven't had an exit or returned much capital in the last year.

We also think there's a growing trend among smaller VC firms where they are reducing the size of their average fund, shortening their capital cycle from four years to two, and raising new funds more frequently.

What about trends you see in venture-backed firms and how they will fare in 2008?

We foresee a modest increase in IPOs, but we think that M&A activity will continue to dominate on exits, with lots of action particularly in the media sector. Traditional outlets are still struggling to develop new advertising models for the Internet, so they are consolidating their efforts by buying out these smaller niche media companies because they need them to move online. The other thing that's driving the media markets is the convergence of different data types, including voice and video. Phone companies are becoming TV companies now, and cable companies, because they're providing video on demand.

Teenagers now are spending more hours a week on the Internet than they are watching TV, but advertisers are still just scratching the surface of the Internet as an advertising medium, so there's a lot of growth still to happen there.

You invest primarily in high-tech companies. What's going on there?

We see two tendrils to every large technology disruption. In the early stages of adoption of a new technology, it gets hugely overhyped, way too many players try to get into the space, and there's a massive crash within about two years. This happened with the PC when it was introduced. It happened with the Internet during the bubble. But it's not that new: In 1929, there were 120 telephone companies in New York City alone.

After the crash, things shake out, and within about 10 years, it becomes obvious that the technology has had a huge impact in its own right. We think that's about where we are now with the high-tech industry.

What's the next big thing on the technology front?

We think there's going to be much additional focus on clean-energy technology. A lot of funds are being raised in that sector and there's been a shift in perception. It's not just "greens" who are promoting clean tech these days, but also military and conservative people who are increasingly aware that we're getting more of our oil from very unstable regions of the world. Clean technology is becoming important to the national security strategic discussion at many, many levels. The hawks are starting to see [importation of foreign oil] as a huge economic threat for the U.S., and that's why we're seeing many different constituencies getting behind the green energy movement.