Venture capital keeps getting squeezed as an asset class. The second quarter of 2009 saw the lowest level of capital going into VC funds since the first quarter of 2003, according to the National Venture Capital Association (NCVA). During the second quarter, VC funds in the U.S. raised only $1.7 billion, an 82 percent drop from the second quarter of 2008, when $9.3 billion was raised. The amount raised is 63 percent less than than the $4.6 billion raised during the first quarter of 2009 (see interactive iCharts below).
The number of funds which raised capital also dropped in half from last quarter to 25 funds, a 13-year low. And the average amount of new capital going to each fund was $68 million, down from $94 million in the previous quarter.
Capital is fleeing the sector, partly because there is less capital to go around, and partly because venture capital exits appear to be blocked. Although there was cause for hope during the quarter—which saw five venture-backed IPOs poke their heads above the water—the NCVA doesn’t expect venture funds to bring in major new infusions of capital until 2010.
For startups with proven traction there is still money out there. For instance, Pandora just raised a massive $35 million round last week and we tracked $6.4 billion in venture money going into companies last quarter, a 25 percent drop from the year before but still a healthy rate of investment. VCs are getting more selective about where they put their cash, but when they do they are more likely to bet big.
Well, this can’t be good. But the good thing is that more companies will have to think more creatively to raise and make money. Which also means we will see better startups in the process. I wish all the best for the startups out there… just hang on and keep on believing!
- Darren at AdExcel dot Com
This is great news. News to be celebrated. It will thin the herd, sort a speak, and only those products that provide a service and generate revenue will remain.
Perhaps, just perhaps, it’s time for the manicured hands and ski sweaters of the Valley to come out from their computers. Pick up a shovel, and actually BUILD something.
Something–of course–that actually matters.
This is exactly what will not happen. VCs are touting the virtue of “freeconomics” that gives validity to their habit of investing in companies that lack solid revenue models but are “cool” enough to create a lot of hype around. Looks like it’s pump and dump all over again.
Simpleton.
Follow me slowly. VCs aren’t investing chiefly because they cannot meet their own internal funding–so they essentially have no money to invest themselves.
Nothing comes without a price. Your junior high definition of “freeconomics” is laughable. You must still be in community college.
The moral, son, is this: Trustfund sons of their more successful fathers aren’t as brilliant as you once thought they were. The people who agree with me are not people you know.
They are people with money. Money they no longer contribute to sleepy, underperforming, Valley-centric, Protestant, Venture Capital firms.
Now might not be the best time to go looking for VC, but I bet as soon as it starts to ramp back up it’s going to be a feeding frenzy — VC handing out cash left and right. At least that’s what I keep telling myself to keep the energy to press on with my startups
very true. gotta be creative ….
I agree with Darren, companies will have to think more creative to get money. Companies will be more careful as to what companies they invest in.
http://www.twibeo.com
The entertainment Twitter.
So they’ve come to the realization that blowing millions on worthless applications gives them nothing in return. Imagine that, for the hundredth time.
The era of ’stupid’ investing is over. Again. Big news. VCs are always looking for a one-in-a-million opportunity. note to VCs — “good luck with that.”
any chance of getting the data from a bigger time range ? let’s say 99 to 09 ?
Hmmm lets see – the US needs to raise about $2T a year, this year and every year for the foreseeable future. To put it in prospective $2T is more capital than has been raised by the entire VC industry since the start of venture capital in 1959. (if anyone has the exact numbers please share).
The giant sucking sound you hear is the US Government raising capital, partly by printing money but mostly by selling bonds. Couple in the uncertainty on taxes for the very wealthy and the lack of VC exits and you have a deadly problem.
Sorry. I was so happy to hear the news of the demise of lazy, sleepy Valley VC spending I didn’t proof read my rant.
It happens.
This is very bad news. Less venture capital means less money and hiring for startups.
Agreed. There are so many businesses that benefit directly and indirectly from VC’s being “dumb” and throwing cash around.
Landlords, staffing / HR, restaurateurs, insurance, the list goes on and on…
I keep thinking more and more that Reid H was right in saying the GOV should give the money to VC’s…
Wrong. Less dumb venture money means less money for fake startups — “businesses” started by well-connected individuals that don’t make money — to compete with businesses that do make money.
For businesses that do many money; that have technology and paying customers this isn’t necessarily a bad thing at all; it helps us get rid of competitors who shouldn’t exist.
For some businesses that need expansion capital, or who have great tech that needs a lot of up-front R&D $$, there will always be investors. This is just the market taking its entirely predictable toll on all the dumb decisions VC’s made to invest in the umpteenth social media copycat that failed miserably.
What I want is access back into iCharts. TechCrunch is making me jealous.
FINALLY. Thank the Lord! The sound of hot air escaping from the VC bubble (and from the mouths of some those arrogant, worthless pricks) portends good things to come for entrepreneurs, for their customers and for the remaining players. Yay!
It’s actually NVCA not NCVA…
Good thing the democrats are funding stem cell research, as you have a potential buyer for your marrow.
Unfortunately for you, fewer invites speaking engagements, less time on the slopes.
Aint that right, Ski Sweater.
Like just about every other market in the world, venture capital has cycles. We are simply in one of those cycles. At some point the IPO market will come roaring back and the venture capital will be a darling again.
I have a difficult time believing that “Capital is fleeing the sector… partly because venture capital exits appear to be blocked”. Do you actually think that institutional investors are looking at the IPO market of today when deciding to invest in a VC fund? With the average time to exit of 7 years for most startups, the IPO market of today should have no bearing on such an investment today.
Certainly, with less capital flowing in the financial markets, it will be tougher to raise a fund, thus weeding out the lower performing VC firms. Likely a good thing. Darwin at work.
@ErickSchonfeld @JonathanAberman Good points. VC hating is a past-time here in 94301 and 94025.
@ChrisRodde. Cycles apply to legislation as well… Sarbanes Oxley will be dead in a year and the conference panels will be, “Ohh muh gawd, you can go public to raise $50k with less than $2k in WSGR legal fees”
Thanks for introducing me to iCharts.
Put on your macroeconomics hat and look at the GDP equation: G + I + C, dG/dt is now definitely larger than dI/dt. President Obama is now the biggest VC in the world.
As fundraising falls, it prompts more navel gazing about the state of the Venture Capital industry. The comments that you see for an article like this are always interesting — so much hating on VCs! What is getting lost in the shuffle here are some big points though:
1. Venture capital has been an essential part of technology commercialization for the last 40 years.
2. It’s much more than just funding Internet companies.
3. Many new business ideas can’t do a “freemium” model, and require capital. It’s really only New Media companies that can pursue this.
4. Without VC new industries are going to be slower to develop.
5. Bootstrapping is the order of the day for entrepreneurs, but that should be their viewpoint anyway — equity is expensive.
6. Most VCs are not jerks or lazy and have good skills to bring to company formation.
7. The funding gap this is being created will need to be fixed.
http://kipmcc.w...-update-for-q2/
this is happening for three reasons:
1. the asset class is going negative based on the commonly used 10-year rolling average return calculation
2. there is effectively no exit market via IPOs or M&A…certainly nothing consistent and remotely predictable
3. there remains a significant liquidity crisis in the limited partner world of university endowments and public pension funds
wow ..awesome ..!!
be nice to throw a few startup bucks this way..lol
Just cant stop my self to comment on your blog. Good post.