Food for thought from Fred Destin

Fred Destin, possibly the quintessential European VC (a Belgian living in Switzerland but traveling Europe looking for startups), has a must-read post on his blog about “the funding drought”. Here are a few highlights (quite a few, actually, since it’s so good):

Don’t believe the hype. Yes, it’s a nice environment to be starting the winners of tomorrow and seed funding has not dried up. And yes, Wellington and friends feel Spotify is the [Google][Apple] of media and pay (supposedly) €200m pre for the privilege of working with the excellent Messieurs Ek and Lorentzon. But do not let these facts distract you, for most companies are facing a period of extended drought.

– Many funds are either failing to raise or are deciding to postpone their fundraising. Hence they have to live for longer with the cash at hand. That means reduced investment pace and a generally defensive stance.

– Companies are needing more cash. Even late stage “safe” businesses suddenly revert to spending hundreds of thousands a month as they grapple with a tough economy and expansion plans gone wrong. Exits are few and far between and the alternative sources of finance have dried up.

– Most funds were under-reserved for this crisis. In other words, the ratio of reserves held back versus capital invested was too low. Now, as you decide to hold back say $2 per $1 invested, all of a sudden cash planning shows a massive gap. The result is ruthless portfolio triage and weakened syndicates.

– Lack of visibility on when this crisis ends and when liquidity returns blocks decision-making and risk-taking

We seem to be turning a corner and the worst may well be behind us, with some new fund initiatives such as Birch/Hoberman’s ProFounders or the Boyz at Atomico. But this will not solve the funding crunch fast. For most companies out there in the “grey zone” (worthy but not obviously hot), it’s tough and it’s going to remain that way.

Go here for the full post. What do you think? Is Destin being too pessimistic?