Notes of Note from John F. Ince

Excellent analysis of the current state of Venture Capital Investing in Silicon Valley …

How gloomy is this picture for venture capital firms? According to an NVCA survey, 90 percent of venture capitalists who responded expect their industry to contract through 2015.

That trend is well under way. While firms have not started collapsing en masse, they have been quietly shrinking. The number of principals at U.S. venture firms fell from 8,892 in 2007 to 6,828 in 2008. As firms raise smaller funds, they need fewer people to invest.

Some will argue that at least in the area of Web startups, companies can be launched on the cheap, and growing numbers of angel investors — those wealthy individuals who invest at the earliest stages — are stepping in to give these companies a boost. True, but that kind of funding doesn’t work as well for biotechnology, medical devices or cleantech. And these angel-backed companies are small and lean, and don’t create large numbers of jobs.

It’s not just fewer startups, though. When companies don’t go public, they don’t generate the same number of jobs in their later stages. Heesen said the cash raised from an IPO usually triggers an explosion in hiring.

“The real job creation starts far down the road, after they go public,” Heesen said.

Instead of going public, the companies that do show potential now get gobbled up by the Googles and Facebooks of the world. At the same time, valley giants like Hewlett-Packard, Oracle, Intel and Cisco Systems continue their acquisitions of larger tech companies, a consolidation trend that more often than not is accompanied by big job cuts.

So we’re seeing fewer startups and sweeping consolidation. Tie those trends together, and you’ve got a drag on job creation that could weigh down the valley for years to come.

With venture capital in retreat, we must look elsewhere for a new model for startup funding to kick-start the valley’s next era of innovation and the kind of job creation we desperately need.

via O’Brien: Grim numbers point to the end of the venture capital era – SiliconValley.com.

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