Venture Capital in 2009 – an update for Q2

in my last post on this topic, I suggested that Q2 was the “tell tale” quarter for the year…and the numbers are in.

the NVCA has just released the Q2 numbers and they’re pretty bleak:

Just 25 venture capital funds raised $1.7 billion in the second quarter of 2009, according to Thomson Reuters and the National Venture Capital Association (NVCA).  This level represents the smallest number of venture funds raising money in a single quarter since the third quarter of 1996 (21 funds) and the lowest level of dollars committed since the first quarter of 2003 when $938.1 million was raised.

Total VC Fund Raising by Quarter

Total VC Fund Raising by Quarter

Total so far this year is right at $6 billion. If we stay at this level, my suggestion that 2009 could be a $10b or less year is still possible.

The key take-away from my perspective is that the cost of capital will remain high and probably increase throughout the rest of this year, at least.

To re-state, I believe this is happening for three reasons:

  1. the asset class is going negative based on the commonly used 10-year rolling average return calculation
  2. there is effectively no exit market via IPOs or M&A…certainly nothing consistent and remotely predictable
  3. there remains a significant liquidity crisis in the limited partner world of university endowments and public pension funds

TechCrunch says:

For startups with proven traction there is still money out there. For instance, Pandora just raised a massive $35 million round last week and we tracked $6.4 billion in venture money going into companies last quarter, a 25 percent drop from the year before but still a healthy rate of investment. VCs are getting more selective about where they put their cash, but when they do they are more likely to bet big.

…to which I say:  when rounds of financing get big, now, in the absence of exits and the squeeze on the VC industry…well, that isn’t necessarily a good idea. And, as coincidence would have it, here’s an example of exactly that:

AdAge asks and answers:  “What Sank (video start-ups) Veoh and Joost? Too Much Cash Too Soon”

There are many reasons why things went wrong: technical missteps, lack of premium content, tough terms from content owners such as CBS and Viacom, etc. But that’s not the whole story. Joost and Veoh had an even bigger problem, one that will likely claim dozens of other media and advertising startups that have been founded over the past three years: too much venture money, too soon.

…and that’s not meant to point any fingers; it takes two parties to do the VC tango: the company and the VC.