Amid Fiscal Uncertainty, Venture Capital Is Way Down In Silicon Valley

Hugh Pickens writes "With the 'fiscal cliff' just weeks away, Chris O'Brien writes that venture capital fundraising in silicon valley is down, the amount invested is down, the number of folks investing in venture capital is down, and the number of VC firms and partners are down. 'The people I talked to in the industry sounded grim even as they tried to make the case for optimism,' writes O'Brien. 'Still, it remains difficult to identify a clear path for turning things around for the battered venture capitalists who make Silicon Valley hum.' So what's wrong with the VC industry? The problems are many and complex but they can be boiled down to one thing: Not enough exits. For the size of venture capital being raised and invested, there simply aren't enough initial public offerings of stock or mergers and acquisitions to generate the returns that funds need. Venture insiders blame the global economic uncertainty. They believe that is part of the reason that giant corporations, which have amassed huge piles of cash, are just sitting on it, rather then using it to acquire startups. 'The numbers are way down,' said Ray Rothrock, a partner at Venrock. 'All these companies with these fantastic balance sheets, and nobody is really buying anything. With all the uncertainty they're facing with the economy and taxes, buying little companies is way down on their list.'"

Comments

Oh no

[Anonymous Coward]

Investors may have to make their returns by the companies they invest in making successful products that people want to buy. Disaster.

Re:Oh no

[amiga3D]

Stupid, you can't read, can you? They aren't investing in anything. The investors are sitting on their money because the economy is so fucked they think they'll lose it on any risk. This causes the economy to stagnate with no jobs created and no revenue to enable the government to pay it's debts or even to meet it's obligations meaning it borrows even more money. Right now we're going down the hole at 100 billion dollars a month and no sign it's going to get better in the near term. It may not be a disaster but it is misery.

Re:Oh no

[PPH]

Simple solution: Inflation.

Want to sit on a pile of cash? Fine. It won't be worth much come next year. Greece and Spain (and the US?) are too deep in debt? No problem. Pay your (fixed) obligations with tomorrow's devalued currency.

The problem is that the political landscape is being manipulated by people who have tons of cash and demand a risk-free guaranteed ROI. That's what caused the whole mortgage crisis. People with money went to Congress and then Goldman Sachs demanding some sort of paper that had zero risk and paid big interest. And Goldman's Morlocks went to work creating them for all the rich folks upstairs. But then someone blew the horn.

Sorry. No more free lunch. With return comes risk. Don't like it? Buy a mattress.

Re:Oh no

[amiga3D]

I don't think they mind risk so much, it's certain doom they can't abide.

Re:Oh no

[BlueStrat]

Investors may have to make their returns by the companies they invest in making successful products that people want to buy. Disaster.

Stupid, you can't read, can you? They aren't investing in anything. The investors are sitting on their money because the economy is so fucked they think they'll lose it on any risk. This causes the economy to stagnate with no jobs created and no revenue to enable the government to pay it's debts or even to meet it's obligations meaning it borrows even more money. Right now we're going down the hole at 100 billion dollars a month and no sign it's going to get better in the near term. It may not be a disaster but it is misery.

I agree with everything you've stated and I understand your frustration at such ignorance, but you're almost certainly wasting your breath. AC is likely a product of the US public school and university system which hasn't taught students how to think for decades, instead simply teaching what to think. They are simply unequipped to comprehend what you are saying.

Sadly, this means that your efforts to inform and enlighten many here are much akin to trying to teach a dog to solve advanced differential equations; A frustrating waste of time for you, and annoying as hell for the dog.

I do love the schadenfreude in that many here who are being negatively affected voted to reelect the guy who promised as part of his campaign and who just announced he would not sign any budget or tax legislation that doesn't raise taxes on businesses and "the rich", which just throws gasoline on the economic Dresden.

Strat

Re:Oh no

[tacokill]

Yes but inflation is different. The upper classes own assets. Asset values can move up and down during inflation. ie: see gold.

The poor hold money - dollars. Those only go one direction during inflation: down.

Re:Oh no

[hey!]

And the words "fiscal cliff" has nothing to do with this?

The problem is that they're expecting a renewed recession when taxes go up and government spending goes down. The government will be taking more money out of the economy and putting less into it.

Anybody as freaked out by current government borrowing as you describe is simply being hysterical. Sure the deficit at a historical high in absolute terms, but its nowhere near a historical high as percent of GDP. On top of that the government is currently borrowing money at or below the rate of inflation. It'd be insane not to borrow when people are in effect *paying* us to hold onto it for them. Check out the recent ten year treasury rate and compare it to inflation.

No business would worry about borrowing money at an interest rate below what it can earn by holding onto the cash it already has. That's why *every* large business borrows money, even when it's profitable. It's counter-intuitive if you think of business and government budgeting like they were normal household budgeting, but business and governments aren't like typical private households. Even wealthy *individuals* borrow money when the interest rates are favorable. I once had a wealthy young trust fund kid working for me who borrowed money from the bank to buy a yacht. It made no sense for him to liquidate his investments when those investments earned more than the bank's interest rate.

There's a time to worry about government borrowing, and that's in a full economy where dollars in the private sector are creating jobs like crazy. Nobody seems to worry about austerity then, when interest rates are high, but they should. But when interest rates are low, suddenly people freak out about borrowing money. It's hysterical fear, that's all.

Re:Oh no

[approachingZero]

Maybe somebody should have explained this to the poor before they voted for Obama. To bad, guess they'll learn the hard way.

Re:Oh no

[tukang]

With debt being the exception. If I owe you a dollar, the debt is an asset to you but a liability to me. Inflation reduces the purchasing power of the dollar I have to pay you back with, so it benefits the borrower. Likewise anyone with a mortgage, student loan, auto loan stands to benefit from inflation.

The question is who holds more debt? Is it the poor or the rich? And the answer isn't clear to me

Re:Oh no

[ranton]

The poor hold money - dollars. Those only go one direction during inflation: down.

But the poor don't hold dollars. They don't hold much of anything of value. They may own a house (that generally increases in value during inflation) and are promised social security benefits (where payments increase based on inflation). I don't see how the poor are punished almost at all by inflation. In fact it seems to help them.

Stagflation is worse, of course, but that isn't what anyone in this thread has been talking about.

Re:Oh no

[artor3]

The poor don't hold dollars. They hold negative dollars, in the form of debts exceeding their assets. Inflation still hurts them, since prices rise faster than wages and when you're living hand to mouth, you can't afford to have your wages lag price increases. But that's only a problem if inflation is really high, like it was back under Carter. A bit of inflation is a quite nice way to push the wealthy to invest without hurting the poor.

Re:Oh no

[thoth]

And you in turn seem to be a vacuous moron repeating the tired conservative talking points they've used for about 50 years.
Meanwhile, in the fact-based universe, there isn't any evidence that raising taxes will tank the economy. Economic growth is strongest under Democratic presidents and their policies, and that's been true since FDR. The CBO recently studied the numbers and concluded there is no evidence that lowering taxes spurs the economy. What did the GOP do in response? Learn? Hell no, they suppressed the report.
That quote about trying to teach a dog difference equations? That's actually what it is like to reason with conservatives. They're simply too stupid to change. They don't respond to reason. Conservative economic theory has more in common with religion than anything else - entire chunks of it are simply taken on faith despite having no existing proof in the real world. Whenever something fails, the answer is the No True Scotsman explanation.

Re:Oh no

[drsmithy]

I don't see how the poor are punished almost at all by inflation. In fact it seems to help them.

Low-end - heck, even most mid-range - wages rarely rise as much or as quickly as inflation.

The poor are punished more because they put the majority of their income towards survival, which increase in price (much) faster than their income. The middle classes can at least absorb price increases out of their discretionary expenses so they don't end up starving in the street.

Re:Oh no

[Serious Callers Only]

That's the problem: you always want to spend other people's money, except, there's nothing to make people create wealth (start businesses, invest in startups and infrastructure, etc) to tax, and eventually, as Thatcher said, you run out of other people's money.

There is such a thing as society, and it paid for your roads, your schools, your prisons, your police force, your fire service, and it subsidises your hospitals, your water mains, your gas supplies, your reliable electricity supplies and the very fabric of civilisation you take for granted to start your business. Society is funded through taxes, and gives back in services and support (i.e. not in money) - it's an exchange of some income for the privileges living in a civilised country give you. Think on that next time you view yourself as a wealth creator and everyone working for the government as parasites.

Alternate theory:

[fuzzyfuzzyfungus]

Much of the VC activity(and startup acquisition by larger outfits) in the valley has been based on absurd speculative bullshit only slightly less risible than pets.com. Now, with the supply of bigger suckers on which to unload your worthless stock in some 'disruptive' Web2.0/mobile/social/bullshit apparently drying up a bit, non-idiots are staying away.

Good heavens, whatever shall we do?

Re:Alternate theory:

[phantomfive]

It is unlikely that the supply of 'bigger suckers' is drying up, right now, at this moment 40,000 years since we evolved.

Re:Alternate theory:

[fuzzyfuzzyfungus]

It would probably be fairer to say that they are moving somewhere else, rather than drying up entirely.

From TFA ""Limited partners are getting fatigued from giving money to venture capital and getting back less than they give," said Tracy Lefteroff, global managing partner of the venture capital practice at PWC."

and

"Joe Dear, CalPERS' chief investment officer, told Reuters: "Venture has been the most disappointing asset class over the past 10 years as far as returns. ""

Suckers do sometimes catch on, eventually. This is unlikely to cure them in an absolute sense; but it makes it more likely that they will move to being suckers about some other flavor of asset.

The other thing that really gives me the 'yeah, it's a bubble that's starting to pop, go cry." feeling is the assertion that "So what's wrong with the VC industry? The problems are many and complex. But they can be boiled down to this: Not enough exits.".

You have an industry that is basically the tech-jockey equivalent of flipping houses with borrowed money. During the expansion phase of a bubble, that can work out rather well. At other times, you find yourself facing the tougher challenge of "actually producing houses people want to live in" and "living on the margins of a renovation contractor; because that's actually the only value you are adding".

The VC guys apparently aren't willing(or perhaps aren't capable) to build companies that actually make money, and earn their returns that way, and they apparently aren't capable of building companies attractive enough that firms with cash on hand would rather buy them out than just do it in house or do without. They've run out of suckers and apparently aren't good enough to cater to customers...

Plenty of mergers just not a lot of prime targets

[Anonymous Coward]

Starwars was a merger long over due.
Netflix looks weak.
AMD is in the wings.
Just because google, apple, and microsoft aren't buying every month on doesnt mean a whole lot of fiscal uncertainty.
It just means there isn't a real motivation to swoop in before your competitors beat you to the punch.
It's good to take a break and take a breath in between spending 100 mil.
Seriously if you need a idea to throw your money at.. how about flying cars that drive themselves with solar energy that let me connect with my friends and tweet our international pub crawls while giving us discounts on our next bar in queue.
BTW how's groupons stock doing. Oh right it's only down 85% for the year.

Re:Good.

[zieroh]

It's a great sign. VC money distorts reality in Silicon Valley. I've lived here for 20-odd years, and VC money is at the root of nearly every problem Silicon Valley has.

Re:Good.

[Anonymous Coward]

Those piles of cash the corps are sitting on is the bailout money that was handed out by the government. We wouldn't want it to get in the wrong hands now, would we? We gotta keep the squeeze on to reduce expectations. You can't justify all the coming austerity measures if the economy is all flush with cash. Abundance is poison...

Where are the '-1 outright lie' or '-1 willful ignorance' mods when you need them?

You want certainty?

[PPH]

Fine. We're certain that your tax rate will be going to 39.6% come January first and Greece won't be paying your bonds back.

Feel better? Now get to work.

Bad businesses

[devleopard]

Too little innovation, too many apps like "Mobile photo sharing - FOR CATS!"

The funding game is dying, slowly. The future is in the 37 Signals and GitHubs of the world. (Both took funding I believe, but only after they were profitable : if the VC is how you keep the lights on, you're doing it wrong) Even more significant are the bootstrapped startups, the 1-4 person operations, that make great products that actually solve problems. (In other words, the anti-Instagram)

He said asia/canada

[codegen]

He said Asia/canada not EU. It is true that taxes are higher than in the US. But the overal cost is lower. Before coming back to Academia, I was part of a startup. With the health care support we have in Canada, as well as other benefits, the lower loaded cost of an employee about makes up for the taxes. He also said undertainty. A higher tax rate isn't what kills it, as Warren Buffet has pointed out time and again. Its the endless bickering and inability to settle on a solution that kills it. If the GOP in the house is willing to meet Obama part way, then the situation will improve.

Re:He said asia/canada

[sjames]

Even the worst credible case would have taxes in the upper brackets lower than they were during some of the most prosperous times.

Honestly it sounds more like a knee-jerk reaction to a Democrat being re-elected than it does to any specific policy problem.

Re:He said asia/canada

[kenorland]

f the GOP in the house is willing to meet Obama part way, then the situation will improve.

I don't see why. If the GOP meets Obama part way, Obama will just push the envelope even further, with carbon taxes and more economic tinkering. The problem is Obama's bad economic policies, a continuation of Bush's bad economic policies. No amount of compromise is going to fix that. And Romney wouldn't have been any better either. Our major presidential the last few times around have really sucked.

Re:He said asia/canada

[Mitreya]

I don't see why. If the GOP meets Obama part way, Obama will just push the envelope even further,

And that, ladies and gentlemen, is the problem in a nutshell

The position here is -- If GOP were to ever compromise, even a little bit, they would show weakness and embolden Obama. So the solution is, clearly, to block everything and let the country burn.

One cannot negotiate when ANY compromise is considered an unacceptable sign of weakness. Can you come up with a reason why would Democrats just give up? It's not really a negotiation when one side is not willing to budge an inch, no matter what. The term for that is "throwing a tantrum"

Re:Good.

[Anonymous Coward]

The going over the fiscal cliff and the hitting the debt ceiling are two separate things. We won't hit the debt ceiling until at least mid January...

But both are manufactured financial crisis designed to panic the public into accepting policies that are not in their best interests.

financial cliff, but US has 11 aircraft carriers

[Dan667]

and is building a 12th. The are also a very long list of unneeded military weapon systems that are still funded and rampant corporate welfare. When conservatives want to talk about real fiscal responsibility and not just making the really rich richer than they might be able to say the words "financial cliff" without me laughing at their pure greed.

Bullshit

[PopeRatzo]

This is nothing but FUD.

"Fiscal uncertainty" isn't going to dissuade anyone from making a buck if it can be made.

And in real terms, in real, honest-to-god terms of providing good lives and good jobs for people right here in this country, I'm not all that sure that "venture capital" really means all that much. Oh, it means a lot to those who have it, and for a few minutes it means something to a handful of their pals, but if there is going to be a resurgence of innovation and growth in this country, it's not going to come from "venture capital". Because, as I said, if there's a buck to be made, even if taxes are high, people will line up to get it, regardless of the tax rates. Remember, this whole thing is over whether or not we're going to go back to the tax rates we had during the Clinton administration when everybody was making money.

There was venture capital in every hot and cold tap during the 90s, and all we got was this lousy popped bubble.

Real federal tax rates have never been lower for "venture capital". Is paying 14% really so onerous?

The whole "John Galt" story shows just how incapable of self-examination our economic elite have become. The notion that if the captains of industry are so important - such unique snowflakes - that if they were to disappear there wouldn't be a line of people ready and able to jump into that spot is such an example of ego run amok. But we already knew the egos of our financial elite have reached escape velocity that they believe they are worth yearly incomes of over 1000 times what the average worker is worth. What kind of self-regard does it take for someone to believe that?

Let's see how well their little tantrum works out for them.

Their money has already been on the sidelines. I'm guessing that we're in better shape to do without them than they are to do without us. Fuck 'em.

Yes. Inflation

[gr8_phk]

It causes devaluation of cash. The only way to avoid it is to invest in something. And with the fed printing money (see QE, QE2, and QE3) we should be seeing it sometime in 2013. I'm hoping late 2013 or early 2014 but that doesn't seem realistic. Now with the type of QE they did, there is supposedly the option of undoing it somehow, but I'm a bit sceptical.

Why isn't it happening yet? My suspicion is that most of the money went nearly directly to the people who are hoarding it. If it's not circulating it ain't going to cause actual inflation. If this is correct, the Fed truely fucked up. A regulatory and tax climate that allows their last ditch effort to go straight into someones pot of gold would not only eliminate their ability to influence the economy, it would hand it over to someone else ;-(

It's been said that US multinationals are holding over a trillion dollars in offshore cash. So if we do get some signs of inflation they may just go on a buying spree to the tune of a trillion dollars. Watch for inflation to start small and then spike - at least for prices of things huge companies like to buy.

Re:Yes. Inflation

[phantomfive]

It causes devaluation of cash. The only way to avoid it is to invest in something. And with the fed printing money (see QE, QE2, and QE3) we should be seeing it sometime in 2013. I'm hoping late 2013 or early 2014 but that doesn't seem realistic.

We should have seen it in 2010, based on the increase in money supply at that time. Why do you think 2013 will be the year?

Re:GOP Needs to Understand

[mister_playboy]

This is the time for compromise.

Obama is willing to compromise, as long as he gets everything he wants.

Ah, projection... What Republicans do to others, they imagine is being done to them.

The Republicans should have taken the offer they got out of Obama last year, now they'll have to settle for something they like less.

Re:Elections have consequences

[Trepidity]

The decline in VC spending did not start on November 7, and is not due to feverish fears of Obama. It dates to earlier this year at the latest, and is more related to spectacular flops in Bubble 2.0, stuff like Zynga's IPO going down in flames. It's not really Obama's fault that a lot of the tech bubble companies have no business plan.

Re:Elections have consequences

[artor3]

Turn off Fox. They're poisoning your mind, and stripping you of your ability to reason.

Corporations want the recession to continue. They make record profits during recession. They can use it as an excuse to lay off your coworkers, make you do the work of two people, and pay you less to boot. As if that's not enough, they tell you over and over that you must destroy your safety net and using the saving to cut their taxes, making things even better for them and even worse for you. They are conning you.

I'd like to refute your claims in greater detail, but the fact is that you haven't provided any details to refute. You're just insisting that Obamacare is somehow destroying the economy, but have you given any thought into how that could even be possible? No, of course not. The nice man on TV said so, and he said a bunch of other words that sounded smart, and he said them so confidently! It must be true!

Re:GOP Needs to Understand

[Artifakt]

Just since the election, the Republicans (or at least John Boehner) have offered, as a supposed compromise, that if the government gets more income from better economic circumstances, tax reforms, and cutting waste, the republicans will allow the government to some of that money. Since he has absolutely no pwere to stop the government from recieveing any income that comes from such sources, this is like me offereing to allow gravity to work normally, and then claiming I've made a good offer of compromise and now the other side needs to give me something.

            Really, that's a compromise only in Boenerspeak - cut the programs the Republicans say we can't afford, implement all the methods suposedly part of Mitt Romney's tax plan instead of the President's, fund every single defense and homeland security program the Republicans want, and then if revenues go up, he's willing to allow some of those revenues to be kept by the government, and maybe even spent on something besides the Republican priorities.

          THAT's his first new 'compromise' offer since the election - give him and his party 100% control over existing funds and IF somehow the economy does better than he expects, he will let the government have the extra taxes this produces, and just maybe even let his opposition restart SOME of the programs for which he's demanding complete shutdowns. How does he propose to stop the government from accepting new tax revenues if they don't give him everything he demands? Does John Boehner actually have the power to unilaterally refuse new revenues and send them back to to the donors or spend them somewhere else? No? Then offering to give up that power is absolutely meaningless.

The VCs and their sense of entitlement.

[140Mandak262Jamuna]

Why the hell should the government make it certain for the VCs? This is free market, pal? Cant stand the heat? Get out of the kitchen.

We don't owe these VCs certain profits. You take the risk. If your bets come off, great, enjoy your fortune after paying the capital gains taxes. If the bet goes bad, cry me a river.

The sense of entitlement these businesses have is astounding. It is your money. Keep it under the mattress if you want. Fund startups at your own risk. Or enjoy it on a beach in Cayman islands. We live in a democracy. We change our House every two years. We change the White House every four years. We change the Senate every six years, 33% every two years. The winner makes new rules. Wanna play? Fine. Wanna take your ball and go home? Good riddance.

Re:Good.

[demachina]

The origin of most of the cash glut recently isn't direct governent bail outs, most of it is due to the massive liquidity injections (a.k.a money printing) being done by the Fed, ECB and various other central banks. They are in a massive race to the bottom to see who can debase their currency faster, juice their exports, and print money to finance massive sovereign debts.

This money printing is mostly propping up the stock market and corporate profitability. It makes it look like all is well, though in reality the value of the dollars those things are measured in is plunging more than the stock market or corporate balance sheets are actually improving. It is a creating an economy based largely on fantasy, and is creating a global Wiemar Republic.

What the Fed is doing is also referred to as Financial repression. It is artificially suppressing interest rates, punishing savers, especially seniors who shun the stock market, and giving debtors, including the U.S. government a giant finance your debt for free card. China has been using massive financial repression for over a decade to juice their economy too.

When central banks start printing money to finance sovereign debt, it is nearly impossible for it to end well. The only question is when will the house of cards they are building collapse.

Re:Elections have consequences

[artor3]

You think corporate profits are going through the roof? Great! Buy some stock.

I did! I made a killing! The markets have done great under Obama. But unemployment stays high because our corporate masters like the fact that they can pressure people into working longer hours for less money. Why would they want to start hiring again when they're getting along just fine as is? And meanwhile the millionaires on Wall Street bitch and moan about how awful it is that they might soon have to pay 20% taxes instead of just 15%, and how we should get that money by taking food and medicine away from poor people instead.

Re:Good.

[hibiki_r]

Not really.

Companies are holding an inordinate amount of money because they don't want to spend it. If the Fed was really threatening the US with high inflation, why the heck would anyone hold cash reserves? You describe it in the next paragraph: Why would savers be punished while companies that are, in essence, saving, are not?

Also, if you really think that the government will debase the currency Weimar style, then you must expect very high inflation, at which point, you can happily purchase inflation indexed securities straight from the treasury. Why then, does the TIPS market project inflation under the Fed target for the forseeable future? Really, you could make a mint.

Go read some Sumner or something.

VC is just one way to get funding

[sjbe]

You need the VC money to "get big fast". If you try to grow organically, you will get crushed by those with better judgement.

Think so? I've worked with a lot of VCs and I assure you that most of them would disagree with you. Most companies are not actually venture backed. Venture capital is only useful for companies with particular funding needs. A typical VC investment will be between $2 million up to maybe $50 million, have a 3-5 year investment horizon, and will be VERY expensive with the VC demanding 25%-60% of the company if not more. Most companies do not fit into the model for VC funding and in fact if you can avoid it you really do not want VC funding because the cost of capital is so extraordinarily high.

Venture Capital funding is just one of many avenues to fund a business. It is a form of Private Equity but not the only one and certainly not the only way to build a successful tech company. VC money is extremely expensive and VC backed companies demonstrably do not succeed at a higher rate than non-VC backed companies.