The room was packed to capacity, some 80 venture capitalists leaning forward eagerly on their chairs to listen to the pending debate on raising early stage capital. And, given the gloomy news of the past 12 months, one could understand why people are eager to rekindle the faith.

The panel was impressive: Alan Duncan [Prelude Trust], Tim Brown [Alta Berkeley], Charles Irving [Pond Ventures] and Ernie Richardson [MTI]. The discussion began with the question: are we in fact seeing a paradigm shift in the venture capital industry or is this simply the bumpy part of the cycle? “Is it cyclical? I bloody well hope so!”, laughed Paul Duncan, no doubt voicing the thoughts of many in the room. The general consensus was that gone were the heady days where anyone with a business plan on a napkin could find funding; but that, one the brighter side, the need for good technologies that can satisfy the fast-changing needs of consumers will remain. The panelists agreed that it may well be a case of which companies can ride out the next year or two – a scenario in which the last man standing will reap the benefits when the big corporates realise that they DO need to invest in technology – and quickly. However, the panel was keen to stress that it is no longer good enough for companies to have a “really cool technology”. Technology,  especially in this market, is only as good as the immediate relevance of the consumer proposition it supports, and so start-ups should be focused on the end-user market.

In terms of the structure of the venture capital market, the common view was that attrition, not consolidation, would reduce the number of players in the future, and that VCs are tending towards specializing in either the early stages – Seed or Series A rounds – or the much later stages. The B Series is proving a tough sell these days, as most VCs are focusing on their own portfolios. Needless to say, though, early stage investing remains a high risk game; Charles Irving perhaps summed it up best when he commented: “In our “triangle of risk”, searching for shipwrecks is closely followed by early stage investments”. The good news for VCs is that the deal flow has far from dried up and, on the contrary, the quality of what they are seeing is the highest in years.

The conclusion? Perhaps a tough market isn’t such a bad thing after all. Indeed, for those tough enough to last to the end of the race, there seems to be a worthwhile reward.

This Breakfast Forum was sponsored and organised by Renoir Partners, an executive search firm that advises investors and senior management teams of early stage technology companies in Europe and America on the acquisition and management of their human resources.  Renoir Partners was voted Executive Search Firm of the Year at the UK Technology Partnering & Investment Awards 2002. For further information, see: http://www.renoirpartners.com