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June 13, 2001 Event
The VC Spigot Runs Dry: Temporary Buyers Strike or Inevitable Return to Sanity?
Megabuck IPOs are gone. Dot-com bankruptcies are soaring. And no one is sure of the next big thing, on the Internet or otherwise. Is it any wonder that the ability to procure VC funding has all but disappeared? Hardly, but the magnitude of the collapse is startling. In Q1 2001, venture-backed companies raised $10.1 billion, a 40% drop from Q4 2000 and a 61% dive versus Q1 2000. In addition, in a sign of the lower valuations VCs are assigning to young companies, median investment dropped, too -- from $10.9 million in Q4 2000 to $9.5 million in Q1 2001. Interestingly, these figures are not all-time lows; they simply are a return to preboom levels of 1995. Yet that fact is no consolation to entrepreneurs locked out of the money game. Has the gravy train ended for good? Is the tightening of VC belts a temporary phenomenon or is it the reality of a restrained future?
The extreme shift from the allocation of investment capital to its conservation is perhaps most apparent to those entrepreneurs seeking early-stage investments. In stark contrast to 1999, start-ups no longer call the shots, and have no choice but to entertain single-digit valuations from whatever funding source they can find. It shows: fledgling companies raised $2.08 billion in the Q1 2001, compared to $7.16 billion during the same period last year. Though it is difficult to be an entrepreneur right now, there may be a positive side to the scarcity of dollars. Entrepreneurs who do manage to raise VC money now face less competition for employees, real estate, and other critical resources. In the last couple of years, it has been incredibly difficult to create successful, lasting enterprises. In current times, it may be difficult to raise money, but easier to build a great company.
The sudden erosion of venture capital funding is not an unprecedented event, and may even be cyclical. In the 80's, VC activity was booming, as investments flowed into a promising new generation of PC, disk drive, and software companies. Then the market collapsed. Since VCs depend almost entirely on the public markets for their investment returns, they too collapsed. The effect was not short lived; the entire venture industry remained anemic through to the end of the 80's. The irony of the recent correction is that there's plenty of money on the sidelines. In 1995, only one VC firm had a fund size of $1 billion or greater. Today, there are more than thirty such funds. Many investors are sitting on war chests, but they're being cautious. And while there is no doubt that some activity will return, overall level is unknown. The question for many entrepreneurs is simply: When?
Looking Back While Looking Ahead
