Update on Venture Capital
I previously posted on the slowing VC investment cycle and potential effect on innovation (http://www.infosysblogs.com/finspeak/2009/03/from_where_will_the_innovation.html#more). I wanted to provide an update on the subject, thanks to recent information released from the National Venture Capital Association (NVCA).
MoneyTree has the Q1 numbers that reflect a 61% drop YOY and 47% drop in investments from Q4. With this sort of slow down, it is not surprising that the NVCA is proposing new solutions to get their sector moving again. My only concern is that they are benchmarking statistics to the late nineties boom which was a massive outlier in regards to any other time period in the last 30 years (NVCA posts this data in their presentation http://www.slideshare.net/NVCA/nvca-4pillar-plan-to-restore-liquidity-in-the-us-venture-capital-industry-1360905?type=presentation ). Yes, IPO volume is down, those IPOs are requiring more funding and the timelines to harvest are growing when compared to 1998, however, I am not really we will get back there any time soon. It is sort of like asking for 2006-07 back for Private Equity buyouts, it may be a while.
With that said, I do appreciate the points they have put forth, namely
- Enhancing the Ecosystem- Encourage new buyers and better accounting support by changing their relationship with investment banks and accounting firms
- Increase Liquidity- Support new market platforms and boutique bank participation
- Pro-Growth Tax Incentives- Promote investment for certain technologies
- Optimize Regulation for VC- Better coordinate regulation to support VC
Really, you have two systemic changes to their process and two macro changes that have created a drag on VC through attempts to fix other financial industry issues. I can sympathize with their current situation of being hurt by regulations not intended to harm VC, but have to assume trying to enact regulatory exceptions will be a much harder task than fixing their own inefficiencies.
There is a contrarian view to this argument that contraction is needed by the sector as a whole and that the NVCA is solving the wrong problem. The blog www.avc.com has put together a compelling argument on VC Math showing that there should be less funding in the sector since it cannot support the expected returns. Assumedly, this would be a self-correcting problem if true as investors would move to other asset classes.
