Beginning of End of (This) Tech Bubble? VC Fundraising Plummets

Beginning of End of (This) Tech Bubble? VC Fundraising Plummets

Is the air starting to leak out of the latest technology bubble?

Venture capital firms are taking it in the chin, finding it much harder to raise money when Crazy Bernanke is not running the printing presses as fast as he can.  The LA Times reports (Hat tip Carson for sending this along):

Firms raised $1.7 billion in the third quarter, said the National Venture Capital Assn. That’s 53% less than the $3.5 billion raised in the same period a year earlier and the smallest pot since the third quarter of 2003.

The year started out with heavy fundraising, garnering $7.6 billion in the first quarter.

But then the economic recovery began to sag. Europe found itself mired in a debt crisis. U.S. credit was downgraded. Companies began delaying or calling off anticipated initial public offerings -–Zynga, Groupon and Facebook have all yet to go public, despite rampant speculation.

The VC, and by proxy, startup industry are heavily dependent on the IPO market.  I gave a talk a few months ago to a roomful of aspiring entrepreneurs, who found my comments to this tune quite funny – namely that the VC industry is a ponzi scheme of sorts that is dependent upon selling to ever greater fools.  The greatest fool, of course, is your average investor in common stocks – so a robust IPO market is needed to achieve the valuations required to float the returns VCs need on their “big winners”.

If you want to know where the VC funding trend is heading, all you need to do is follow the IPO market.  The only other way VCs can achieve their desired “liquidity” is via a merger/acquisition – which is cute if a company doesn’t have the goods to IPO, but it’s not going to achieve the 50-to-1 shot math they need.  Reason being – acquirers are not stupid, and have the unfortunate habit of paying relatively sane prices for their purchases.

Contrast this with your average investor, who is thrilled to pay insane multiples for the likes of LinkedIn or Pandora.

I’m surprised that Facebook continues to hold back, though they may be waiting for the next round of announced QE to take their shot at it.  If the markets continue to chop sideways in a wide range – say between 700 and 1300 – we could see venture capital and startup activity chop sideways in tandem.  Which I think would actually lead to VC/startup activity looking more like the Nikkei of the last 20 years, with the choppy trend slowly grinding down.  Inconsistent funding is fatal to most VC-backed startups, who depend on that next round of funding like a heroine addict who needs that next kick.

As an aside, I think there’s a lot of stuff getting built right now in Silicon Valley that nobody really needs.  Sure, you’ll get some cool products and apps out of it, but I think the current boom in the Valley is more of a product of QE2 than most involved would like to admit.

Categories