We’ve been reflecting a lot during the past few days on 2009, and the past year was by far our busiest and most impactful year in our firm’s four-year life. Like the rest of the industry, we entered early 2009 with questions and doubt. It was a scary, unnerving time with venture firms publicly announcing no new investments, and everywhere you looked were reminders or admonishments to let “good times rest in peace.”

Both sides of the venture capital equation, investors (limited partners) and entrepreneurs, were under tremendous financial stress as the world around us all had changed. For True, the timing of the meltdown created opportunity and significant risk, because we had just successfully closed our second fund in September 2008, literally 48 hours before Lehman Brothers failed. Although we were incredibly lucky because we were in a position to invest, expectations and tensions were high given that the financial world had changed so dramatically.

As a young start-up ourselves, we knew that the path of least resistance would be to follow the crowd and play it safe while the downturn worked its way through the economy, but what would be the opportunity cost for that strategy? In order to figure this out, we went straight to the very heart our model: our Founders. After spending considerable time with each of our Founders and their teams, it became abundantly clear that despite the global economic turmoil, our sector (very early stage technology) was undergoing a fundamental resurgence. The largest trends in technology were creating substantial new markets, in which start-ups had significant opportunity, and these trends were minimally impacted by the global credit/liquidity crisis.

Core innovations in internet-based technologies over the previous ten years were beginning to manifest themselves into large segments. These segments included the social and real-time web, cloud computing infrastructure, mobile products and services, enterprise 2.0 and even new computing devices and hardware. Though a prolonged recession and curtailed consumer spending would eventually impact these segments, in reality these markets were extremely nascent, and, in our view, it was time to build for the future.

We thought 2009 was particularly timely for True because of our very early stage strategy. It’s basic, but it’s true: early stage venture capital has a 5-10 year investment period, which means today’s investments are not directly correlated with current market conditions. The idea of an early stage venture firm cutting its investment in 2009 made no sense to us. For example, it just didn’t stand to reason that because the world was reeling from a (severe) housing and credit crunch, enterprise IT wouldn’t undergo massive re-architecting over the next six years.

As we concluded our research, we formed a thesis: our strategy of investing behind truly great entrepreneurs in early stage technology businesses who are highly capital efficient was well timed for the 2009 market.

We took a deep breath and decided to double down. In January 2009, we doubled our forecast for new deals, and we encouraged our portfolio to become more aggressive in the downturn.

For new deals, True closed 21 new investments in 2009, which compares to 14 in 2008 and 10 in 2007. We can be judged by the company that we keep, and we are fortunate to have invested with an incredible group of entrepreneurs such as Tim Young at SocialCast, Peter Rojas & Ryan Block at GDGT, Howard Lindzon & Soren Macbeth at StockTwits and Jack Abraham at Milo.
(Click here to see a full list of our portfolio.)

Simply making more new investments, however, was not enough. We also had a large portfolio of existing companies that could use our dollars to make the downturn their advantage. We set aside approximately $20 million of our reserve capital to invest in the existing portfolio with an emphasis on making the strong stronger. We believed 2009 would be a good time for our break-out companies to further their lead. Many of these companies took advantage of our reserve capital to acquire competitors (who were distressed), grow market share, deepen product teams, and hire sales folks. We structured our investments as friendly bridges to future rounds, as our intent was not to take advantage of the timing to buy more equity but rather enable our strong companies to get stronger.

We’ll know the real results from our actions in 2009 over the next 5+ years, but the early results of these moves look incredibly promising.

To cap off a big year for the firm, we were recently nominated for the Crunchies for Best VC Firm of 2009, and two of our portfolio companies, Milo and StockTwits were nominated for Best Startup or Product and Best Social App, respectively. We are honored to have been nominated by the industry, and we think this is really a reflection of the great entrepreneurs in the True family. Our mission at True is to help make an entrepreneur’s dream come true, and we founded our firm on the core belief that all power, creativity, and energy in the venture capital ecosystem starts (and ends) with the entrepreneur. We have a total of 51 investments in the portfolio, which equates to 92 Founders and 483 employees. This is an incredible group of people, and each of them has endowed us with their faith and confidence. Our Founders are our biggest source of inspiration for our firm, and their efforts and energies are most responsible for our success.

Thank you to everyone who helped our efforts in 2009. It was a very busy year, and as entrepreneurs ourselves, building True has been and continues to be incredibly gratifying.

Now is not the time to rest on our laurels. Venture capital needs more innovation, and we have an ambitious agenda for the years ahead.

We look forward to working hard for you in 2010 and beyond.

Happy company building!

The same VCs who hunkered down in January were back in the game in September, and they were back in force. We call the rise in new investment activity, “back to school investing”, and it represents a significant return to health after the prolonged hiatus that started in Q4 2008 with the infamous “RIP Good times” slide deck.

Venture is back. And it’s back because of one word: exits.

In Barron’s this weekend, Michael Santoli quoted a March 2007 Speech by Fed Reserve governor Kevin Warsh in which he said “Liquidity is confidence.” Exits mean liquidity, and liquidity brings confidence to GPs (and LPs), which spurs investment.

Just as analysts and pundits were decrying the “end of the venture experiment,” 2009 was quietly becoming an extraordinary year for venture exits, both in IPO and M&A form. Early 2009 venture-backed IPOs of OpenTable, SolarWinds, and more recently Ancestry.com (ACOM) and Fortinet (FTNT) have held up in the aftermarket, and more significantly these deals have demonstrated the public market’s desire for growth and comfort with small(er) company risk. There are rumored to be between 50-100 venture-backed companies that plan to file in Q1 2010. Speculation for 2010 IPOs also includes some game-changing companies, most notably Facebook, LinkedIn, and Zynga.

I was recently in group of VCs when someone asked who at the table had a privately held company in their portfolio with over $100mm in annual revenues? All of us raised our hands. I later asked this question of another group of GPs and got a similar show of hands. Even in our young True portfolio, where the median company age is only 2.5 years, the portfolio turned in a strong Q3, generating over $50 million in revenues. Across the valley, there is huge pent up supply of large, rapidly growing, profitable companies, many of which will succeed in accessing public capital in a healthier IPO market. IPO exits create liquidity for GPs and LPs alike, and early demonstrated returns have already restored some early optimism in the valley.

Another reason for optimism is the recent increase in venture-backed M&A activity. We believe this will accelerate dramatically in the coming months because large cap tech currencies are up, layoffs have made these same companies lean and mean, but it’s also made them hungry.

Simply put, November 2009 looks a lot better than November 2008 if you’re a public tech company. Have a look at the 1-year charts for ORCL, MSFT, ADBE, YHOO, GOOG, AAPL to see the market cap’s steady march up to the right. But ’08 and ’09 were also times of RIFs and cost cutting. Think back to the headlines from last year of Google announcing layoffs. Ditto MSFT and, more recently, AOL, EA, Adobe, etc.

These layoffs have two implications for private company M&A: the first is that by now, most large tech companies have reduced operating expenses dramatically and conserved or generated cash. 2009 was a year of focus, which meant curtailing ambitious new initiatives and reducing R&D spending. These efforts are good to get things cleaned up, but they present a big problem for the future, because big tech needs innovation to grow, and innovation happens fast these days. Many of the most exciting developments in tech are coming from young innovators who are leveraging newer architectures such as web 2.0 and real-time web. Marry those technologies to new distribution channels like Google & Facebook and lower friction sales models like on-demand. New technology, new business models, innovation.

M&A will involve younger companies in the next 12 months, because big tech needs the new stuff, not the old. Electronic Arts buying Playfish for over $400 million, Google’s $750 million purchase of Admob and Intuit buying Mint for $170 million are three recent examples. This should be another good thing for VCs.

Much like the health of the IPO window, the coming M&A Tsunami creates liquidity to the venture business, which will restore confidence in the logic behind the venture capital model. Though admittedly venture takes time, GPs at the “ground level” are seeing this now and acting rationally to deploy capital into this period.

2010 is shaping up to be an extraordinary time for venture capital and by extension, Silicon Valley.

Our mission at True is to help entrepreneurs realize their dreams. In 2005, we spotted an opportunity to build a firm that was more adaptable to the needs of today’s entrepreneurs. We innovated by re-defining the relationship between investor and entrepreneur in a fundamental way, simplifying previously complicated structures, and amassing talent and resources to ease the specific process of starting and building a new company.

We did all of this as former entrepreneurs ourselves, and our overarching goal was to re-align capital with creativity. At True, we firmly believe that the entrepreneur is the center of all power, creativity, and wealth creation in the venture capital model. Our firm and our deals are designed with the entrepreneur as customer.

When we launched in 2005, there were only a handful of super-angel investors in the very-early market: Ron Conway, Reid Hoffman, Ram Shriram, Josh Kopelman (then with his evergreen funds) – to name a few. Institutional capital was scarce, and this was a problem because entrepreneurs had fewer resources in the beginning, and less choice

The great news for entrepreneurs is that this is changing rapidly. Since 2005, we at True have raised 2 institutional funds totaling approximately $375 million, Josh and the team at First Round closed on an institutional fund, as did Stewart and Gilman at Alsop-Louie, and Brad Feld at Foundry. Back East, Spark and Union Square Ventures have each raised two institutional funds, and Alan Patricoff started Greycroft. In addition, many very talented angels such as Mike Maples, Jeff Clavier, Ron Conway (Baseline and Ron’s other angel investments), and Paul Graham at YCombinator have raised institutional dollars.

We estimate that there is now well over $1 billion of institutional capital available to startup entrepreneurs. Make no mistake, there are many talented groups willing to write checks as small as $50K to get a good team and a good idea off the ground.

This could not have happened at a better time. The combination of great entrepreneurial talent, high capital efficiency, widespread broadband infrastructure, and the maturity of mobile and social computing platforms has resulted in tremendous product innovation and massive market opportunities. True witnessed this dynamic first in our consumer investments like Meebo, Automattic, and Sphere, but, since 2005, we have also seen Moore’s law blast away cost in enterprise 2.0, infrastructure, and hardware. We have steadily expanded our investment focus and products into these markets, and we are about to close on our second hardware investment this month.

We are fortunate to live in an incredibly disruptive time.

Which brings us back to reinventing venture capital. The best entrepreneurs want less from VCs today: less capital and fewer constraints in order to take more risk earlier. But the the best are demanding more in terms of new products, services, alignment, attitudes, and business practices from their investors. This means new expectations around board roles and responsibilities, more flexible deal structures, aligned efforts to add value, broader syndicates that amass the resources and participation of multiple groups and multiple angels. This means innovation in venture capital.

We’re excited about the arrival of Andreessen Horowitz to this segment because it means more choice and power available to the early stage entrepreneur. More talent, dynamism, and focus on these challenges will help us all to better serve our customers (entrepreneurs), more quickly modernize the early stage capital markets, and foster fundamental innovation. In removing barriers to entrepreneurial creativity, we will reinvigorate the US economy.

If you are an entrepreneur today, this is an historic time to chase your dreams. With over $1 billion in fresh seed capital in the very early stage market, what are you waiting for?

But in our assessment, the potential of blog-based media is still in it’s infancy, and there remains tremendous opportunity for new media companies to go deeper on topics, create longer form, more in-depth discussions of important trends, and follow stories over time (much in the way that traditional journalism has famously done in news papers . . .think the Washington Post’s coverage of Watergate over multiple stories and months of doggedly pursuing a thesis, or their more recent series on Walter Reed Hospital – both examples top of mind as they were so eloquently discussed this past week at D7 by Katharine Weymouth and Arianna Huffington). Instead of just breaking the news, the best of traditional journalism has often change our world in long form and over a series of stories.

New media has this potential, but to succeed it will require combining all of the hustle and speed of today’s bloggers with new product attributes. Longer-form journalism online requires different packaging, an analytical perspective, significantly different form, and the fostering of a community engaged over the duration of a story or trend’s analysis. Most importantly, in order to produce and enable this type of discussion, new media companies must possess a culture that believes in journalism first, page views last.

We’re surely biased, but we believe GigaOm is incredibly well positioned for this opportunity. The company has successfully built and scaled a network of sites in our industry’s most significant sectors. The talent on the editorial team has broken important stories, established a credible voice in our ecosystem, and consistently produces fantastic analysis. Most importantly, GigaOm has been built on an ethos of journalistic integrity. For everyone who knows and reads Om and his team, it’s overwhelmingly clear that they are first and foremost journalists (and very good ones).

But there is more to do. A longer, more thoughtful conversation is waiting to be had, and GigaOm has just started it.

We’re excited to see Om and Paul evolve the media landscape with GigaOm Pro. Congratulations to the entire team on a really well executed product launch, and congratulations on so boldly evolving our industry.

It is also wonderful to see that the mainstream media is beginning to pick up on the disruption and innovation occurring in the venture business. Many of us started our firms back in 2005-2006, and we recognized that there were challenges and opportunities to the traditional early stage venture model. The combination of growing fund and firm sizes was leaving Sand Hill Road ill-equipped to and uninterested in investing in the beginning phases of startups like Meebo, Automattic, Facebook, Twitter, and others. A band of smaller funds filled this gap, which appears to be widening as Moore’s law begins to invade every corner of the tech world which results in dramatically lower startup costs.

The Very Early stage market is vibrant these days. In addition to those mentioned in the BusinessWeek piece, our friends at Alsop-Louie, Jeff Clavier, Brad and the Foundry crew, Naval at Hitforge, the Founders Fund, OATV, Greycroft, and USV in NY are all busy building firms in this segment. This is exciting, because these are incredibly talented entrepreneurs and investors who are working tirelessly to create more choice for entrepreneurs and foster creativity and innovation.

Congrats, Josh, on a really great article, and thank you BusinessWeek for shedding light on the entrepreneurs and the ecosystem that are so vital to the future to the US economy.