VC prospects outlook

The Fenwick & West Venture Capital Barometer analyzed the valuations and terms of venture financings for 107 Silicon Valley-based technology and life science companies that reported raising capital during the third quarter.
It found that while liquidity, usually in the form of mergers and acquisitions and initial public offerings, has been improving, the overall amount of venture investing is continuing its recent decline as potential investors wait for a more sustainable VC model to appear.
“The likely reason for this is that the venture model is currently out of equilibrium,” said Barry Kramer, a partner of Fenwick & West and co-author of the survey.
“Even though venture funds have reduced their investments in companies, they are still investing more than is being invested in venture funds,” he added. “In other words, over the past couple years, venture funds have had a significantly greater outflow of funds than they have had inflow of new capital. This is not sustainable.”
Kramer said that the valuations at which venture capitalists invest continues to be “relatively reasonable and stable,” but that it is likely valuations will start to decline if the amount of venture investment continues to decrease.


Barry Kramer, a partner at the law firm, notes that the US VC market invested $6.5 billion in start-ups in the quarter but only $1.9 billion raised for new investments, “the math doesn’t work,” he said.

Mr. Kramer goes on to say that ““The VCs are saying there are good companies out there, they deserve to be funded, but if we don’t start seeing the rest of the world agreeing … there’s no way that we’re not going to see less investment by venture capitalists and at reduced valuations,”

The “rest of the world “ does understand that technology is global, entrepreneurs are global and money is global.

From the Global Trends in Venture Capital 2010 Global Report Deloitte 2010 –
1) VC Industry expected to contract in traditional markets (U.S. & Europe) and
grow in emerging markets (China, India & Brazil)
2) Limited Partners expected to shift larger allocations to emerging markets

The larger problem is with the Early Stage Marketplace.
1) There is good Demand (Funding/Partners – but it is not in the US – from the Deloitte 2010 report)
LPs Inclination to Invest in the VC’s Home Country over the next 5 years
Brazil 92% of LPs were more inclined to invest
China 91 % of LPs were more inclined to invest
India 76% were more inclined to invest
US 15% were more inclined to invest and 56% were less inclined to invest
2) There is good Supply (Startups, Entrepreneurs, Support Organizations)

3) The Channels of Distribution are Constrained both geographically and across the stakeholders (Validation Partners, Funders, Sponsoring Organizations and Sponsored Companies.)


Local knowledge and personal relationships will always be the cornerstone of venture investing. But, there must be a rewiring of the total Early Stage Marketplace to recognize that technology is global, entrepreneurs are global and money is global.

It was Elliott Dahan - author of
www.earlystagemarketplace.com