Fred Wilson of Union Square Ventures noted on his blog that there is suspicion about the motives of Sequoia Capital, Ron Conway, Benchmark Capital, and others [UPDATE: including Foundation Capital] who have been warning investors to cut spending and prepare for a very rough period. But I've got to agree with Wilson and say that it just doesn't ring true.
Not that VCs are financial saints only looking for the best for the companies they back. What they want are returns for their investors -- natural enough, if you're business model is smartly using other people's money to make even more. And I'll be the first to say that I've seen some (and dealt with some) pretty unpleasant types in VC chairs, sharks who would take advantage of their mothers if the opportunity was available. But that doesn't describe all VCs, and the current circumstances and facts don't seem to add up to financial types who either helped fuel the current problem or simply ignored it until too late.
There is no upside that I can see in VCs creating a panic, even if you think that they are doing so deliberately. Lower valuations mean worse potential exit strategies, and that is no good for venture capital. Nor is having everyone hiding in a hole. A VC cannot realistically just stay put for a few years and not invest in new companies.
But entrepreneurs are often people who are younger and have not yet been through the range of business cycles that are possible. There are people heading companies who haven't learned though painful experience that conditions can drive you out of business if you cannot find a way to tightly control your spending. The VCs have likely been there and can pass on some important pointers.
So why haven't they been riding closer herd on their investments before now? Because they are investment companies, not management companies. The start-ups getting funds need to be able to manage themselves or no one will ever be interested in an IPO or acquisition. To some degree the VCs have to keep hands off and let corporate management run the company. But when conditions get crazy, as they are on a global basis, of course they're going to watch more closely.
Companies are either in the need of funding, already getting venture cash, or beyond it. Forget the last two cases, as they're as set as they're going to be. The first category includes the companies that need to pay close attention to the advice that's been leaking out. Whether the VCs "should" or "shouldn't" have done something more is immaterial. The advice indicates how they will behave going forward. Any entrepreneur that thinks venture backing is necessary should not waste time getting irritated, but instead figure out how to succeed under the new conditions, or find another idea for the time being.