To VC or not to VC?

Monday, January 5. 2009

Article in the FT today about issues in the VC industry:

The US venture capital industry, which has become an important source of capital for technology start-ups around the world, is facing a severe shake-out that will lead to a contraction in future investments, according to some of Silicon Valley’s leading financiers.

These warnings follow one of the weakest years ever seen for profit-taking by start-up investors, and come amid predictions of an even worse period ahead. Only six companies that were backed by venture capital went public last year, the lowest numbers since the 1970s.

The other main way for start-up investors to realise gains – selling out to other companies – also hit a low point in 2008. Only 325 were sold, the lowest number since 2003, according to Dow Jones VentureSource. This lack of profitable “exits” for investors has come just as venture capital firms were hoping finally to recover from the dotcom hang-over – since many of the companies funded at the peak of the boom are now mature enough to be sold or floated publicly.

Add to this the point that many tech startups right now don't need a lot of capital to get going. A rare (in the history of tech evolution) combination in the last 3-4 years of of many defined/de facto standards, open source software building blocks and powerful new broadband pipes used by large numbers of people has created a rare opportunity to build services on powerful and as yet scarcely exploited platforms.

Prediction for 2009 - the VC industry is going to have to apply many of those "synergy" activities it uses on its investments - but to itself.

Posted by Alan Patrick in Hackers and Startups at 15:53 | Comment (1) | Trackbacks (0)

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Per your next to last paragraph, raising venture capital may not be a good idea in these times. Unless you are convinced that you can create a company that can be sold for hundreds of millions of dollars you are better off not raising VC. With exit valuations falling fast (I think the average technology M&A sale price was something like $19 million in 2008) your startup really has to be one of the lucky few to justify venture level returns - and even then you may not need VC to get going! I wrote more about this in a blog post called "don't raise VC" http://www.startable.com/2008/09/26/dont-raise-venture-capital/

#1 Healy Jones (Homepage) on 2009-01-05 17:02 (Reply)

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