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Venture firms doled out $3 billion to 549 portfolio companies in the first quarter of the year, a 61 percent drop in total dollars and a 45 percent decrease in deals, according to the latest Money Tree report. That’s the least amount of funding offered since […]

Venture firms doled out $3 billion to 549 portfolio companies in the first quarter of the year, a 61 percent drop in total dollars and a 45 percent decrease in deals, according to the latest Money Tree report. That’s the least amount of funding offered since the first quarter of 1997, right before the venture field became utterly inundated with dot-com dollars. It was also the fewest number of deals done in a quarter since 1995, according to the report from PricewaterhouseCoopers and the National Venture Capital Association and based on data provided by Thomson Reuters.

The NVCA blames the dive on the economy and expects a steady increase in investment dollars going into companies during the rest of this year, but it’s possible that the economy has exacerbated the cracks that have been weakening the venture model since so much capital poured in during the bubble years. Some have argued that venture firms should be pouring between $10 billion and $15 billion into startups each year, not the annual average of $26.51 billion invested over the last five years, or last year’s total of $28.3 billion.

If the industry does return to investing in startups like it’s 1995, startups in networking and equipment, healthcare services and IT services saw the least percentage drop in the number of deals done from the same quarter a year ago, signaling that those sectors might be less immune to a retrenchment in venture capital.

But it’s looking especially bad for early-stage companies, with only $900 million invested in early-stage deals this quarter, and the rest going to follow-on rounds and later-stage deals. In the last year, almost three-quarters of the total capital has gone into later stage-deals as VCs continue to fund their older portfolio companies while they wait for an exit. That’s been a theme for a while in the venture world, which leaves a lot of VC portfolios in a type of limbo, where they can’t take on new companies, but can’t get out of their older ones.

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  1. This is hardly a surprise. What is a surprise is that early angel and first round funds are available at all! These guys are not investing in the long haul, they have a specific market function to get in early, and out early – either cutting the investment loose because it’s a poor bet, or cashing in with an IPO. They do not have a business plan that includes hanging on to a company for 7-15 years for the market to realize it’s true value.

    The real problem is that a good well positioned startup needs a viable mid-volume market about 3-4 years from funding, which should match a market peak for the IPO. Market cycles are typically about 10 years for techs … where we have seen the downs in the early 70’s, 80’s, 90’s, including the beginning of this decade when things crashed around 2001. The boom part of that cycle is typically 7-8 years after the previous bottom, which is where IPO’s perform the best. When you reach back into the 50’s and 60’s, we see similar post war cycles in the development and marketing of household appliances, that tell us a lot about what the new product introduction cycle looks like, from early adopters, to mass production which leads to early market saturation. With radios, TV’s, Microwaves, Cameras, blenders, vacuums, which continued into the computer and portable gadget markets.

    There are two thoughts about the 2000 decade cycle … we never had a strong boom cycle for techs this decade, and this bust cycle came several years early. With the next boom cycle naturally positioned 6-7 years out, the VC’s are stuck holding properties that should have been peaking right now. The next good investment cycle is still 2-3 years away, so that investments will have 3-4 years to development their market, and position for IPO with the next boom cycle that is likely to be late in the middle of the next decade.

    I’ve given a talk about the nature of consumer tech markets, and the 10 year cycle regularly since the 1982 bottom that caught computer start-ups completely off guard to due poor market forecasting. The most interesting change in 25 years is globalization, and how poorly US companies have positioned themselves for markets later this century. Jobs go where the manufacturing is … including the R&D jobs.

    Which is probably why the 2008-2009 boom cycle never appeared, fizzling out early this decade.

    What creates boom markets is the secret that most people never figured out.

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  2. This confirms that VC funding is linked to state of economy and not the “Brilliant Ideas”. VCs also turn miserly depending upon the state of economy.

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  3. stacey, my take on the first quarter numbers is here

    http://bit.ly/pQyOb

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  4. I find this to more of an issue with the unrealistic environment that the VC’s have created over the Web2 era.
    Apart from a few winners like Amazon, Google, ebay from the early web2 days, all that is left is to get purchased by some one as an exit. Well, its either been done by now, or the free, free, free and every Free user = value.. models is just not work. There is simply no RETURN in the environment created by this FREE money for a popular but not profitable idea.
    The market has turned into nothing my a sentiment driven gambling device that makes those in the inner circle, spinning this dribble, the only real winners. And right now, they cannot even flip it.. So its all stopping. Dead!!

    Maybe re can get some reality into the VC equation. Building a profitable business is the basics here, not flipping it when you reach the peek of the hype you can build on it. There is a bubble here, its just not the type that pops.

    James

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  5. [...] everyone is so sure. From GigaOm: Some have argued that venture firms should be pouring between $10 billion and $15 billion into [...]

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  6. [...] that money available for early stage deals is disappearing the fastest. Stacey Higginbotham writes: "…it’s looking especially bad for early-stage companies, with only $900 million [...]

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  7. I just saw data that indicates Web 2.0 investments have actually quite been quite healthy so far this year.

    If you strip out Clean Tech, Biotech and hardware investments, Research Capital Corp indicates that hardly any drop in investment activity at all. More here: http://www.shaiberger.com/?p=216.

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  8. [...] everyone is so sure. From GigaOm: “Some have argued that venture firms should be pouring between $10 billion and $15 billion [...]

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  9. [...] data points to what we already know — the irrational exuberance appears to be leaking out of the venture industry as exits stay scarce and returns stagnate. Basically, a whole lot of [...]

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  10. [...] data points to what we already know — the irrational exuberance appears to be leaking out of the venture industry as exits stay scarce and returns stagnate. Basically, a whole lot of [...]

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