Wednesday, February 4, 2009

Venture Capital Down, But Not Out

Just because the numbers are down year to year or quarter to quarter, does not mean anything without reference to historical trends. In venture capital, 2007 was a peak year. It should not surprise anyone that 2008 was not on par. However, 2008 was still a good year for venture capital numbers in comparison to 2004 or 2005.

Dan Primack, from the PEhub, said it well:

“Long Tail” author Chris Anderson yesterday wrote a WSJ piece called The Economics of Giving It Away, arguing that most online businesses can no longer succeed if CPM-based ads are their only revenue stream. I agree, which is why peHUB offer Premium Subscriptions and hosts events like the Shindigs. But I do take issue with one line in Anderson’s piece, in which he says:
“For the first time since 2001, the overall tide of investment and advertising won’t rise. Indeed, it will almost certainly fall. Venture capital has dried up…”
It’s undeniably true that venture capital activity has slowed down, but to say it has “dried up” is a massive overstatement. In fact, it’s closer to a canard.

Venture capitalists funded 833 U.S.-based companies in Q4 2008, for a total of $5.47 billion. That’s well off the $8.08 billion invested in Q4 2007, but it’s hardly “dried up.” In fact, it’s pretty close to where the VC market was at the end of 2005, when just $5.79 billion was invested in 810 companies. Moreover, not a single quarter in 2004 even broke the $5 billion mark.

I understand Anderson’s consternation, and it’s true that today’s entrepreneurs need to show clearer revenue paths than they did 15 months ago. But that’s more a reflection of past VC froth than an ability of quality companies to get funded. But there is still plenty of money available, and there will be going forward. Certain things truly have dried up (VC-backed IPOs, mega-LBOs, etc.), but venture capital isn’t one of them.


Indeed.

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.