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

[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

[fustakrakich]

He won't be spending it. The 'good stewards' will make it all vanish, and blame it on 'the economy'. They're taking the Lincoln Savings and Loan/BCCI Show on the road. It has been happening right under our noses, but the blinders are on tight.

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

[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

[Cyberax]

You can't have a stable inflation without increasing paychecks. Now, it's another the question if paychecks increase fast enough.

I've actually lived through a hyperinflation (Russia in the early 90-s) with peak inflation about 1000% a year. Salaries were rising pretty much in sync with the inflation.

Re:Oh no

[Anonymous Coward]

^ This

Want to see a bank freak the hell out? Say the word deflation.

Notice the Fed keeps inflation at a positive rate... When in the past 3-4 years it should have been negative. They instead pushed the peddle to the floor on inflation. Food/energy prices have nearly doubled. Yet wages have stagnated. Yet both of those are not counted in inflation yet are at the root of all goods sold in our country. It is because of the huge amount of debt the US gov has taken on. They want to erode that debt using inflation. But it can not be perceived as too high or you stall out investments.

Most 'rich' hold a significant amount of debt. It is how they finance huge projects with little risk to their own real assets (stock, bonds, land, metals, companies). They win by a landslide in how much they hold. For example Donald Trump. May look like an idiot (a persona I think he is grooming) but is a rather shrewd guy who has many huge loans out there. Has declared bankruptcy many times. To get creditors off his back. Yet he is still very rich...

Inflation is very real (and decently high at this point). My parents bought a house in 1970 for about 30k. That same house is now 'worth' 130k. My dads house payment was 130 bucks a month. Same payment today would be just shy of 800 a month.

Take a couple of macro classes and you will see how amazing 'leveraged' the whole world is.

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

[onix]

In a society with safety nets, both the poor and rich get something for free, handouts and bailouts. The middle class pays and suffers. Too bad that middle class is eroding.

Re:Oh no

[kcbrown]

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.

While that's true, it's highly misleading. The only time the deficit was higher than it is now was during World War 2 and its immediate aftermath. The current deficit as a percentage of GDP is now even higher than it was during the Great Depression: http://en.wikipedia.org/wiki/File:Publicly_Held_Federal_Debt_1790-2009.png

Remember that government debt is actually money that is borrowed by the government from the private sector and spent on government expenses, which means that, aside from that which is borrowed from the federal reserve system, it is money that could otherwise be invested in private business ventures. In the case of World War 2, there was good reason for such a high deficit: we were fighting a war of global proportions and diverting the majority of the country's resources towards it. There is no such excuse today. The deficit we have today exists solely because the government is too large and is overspending (on the wrong things, no less -- it would be one thing if it were spending most of that on infrastructure improvements that would benefit the country in the future, but instead it is squandering it on things that yield no significant return on the investment).

Re:Oh no

[kubajz]

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

Not necessarily true. Many poor hold debt, not money. With inflation, their interest and principal payments stay constant, making their real debt lower.

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.

Remarkably verbose article

[vlm]

Remarkably verbose article. Somebody's getting paid by the word... The TLDR is: "much like the rest of the economy, the velocity of money is on the decline in the VC/startup field".

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...

Re:Alternate theory:

[fuzzyfuzzyfungus]

I didn't intend to assert that startups are useless; just that if a VC can't make money by funding startups without a ready supply of 'exits', this suggests that the VC is doing a poor job of picking and cultivating startups that are either worth buying or capable of becoming profitable in their own right.

In theory, part of the value-add that a VC, rather than an ordinary loan, provides is some combination of expert judgement(so a good VC should theoretically be backing a better-than-average set of startups) and management/strategy/etc. guidance(so a startup with a good VC should theoretically be better off than an equivalent startup with a generic loan). If a VC can only perform well when the market is loaded with 'exits', and even lousy startups are managing to IPO or get sold, that suggests that they aren't actually any good at picking or building good startups.

(The other thing that makes me doubt the 'regulatory uncertainty' theory is this consideration: If I am a company sitting on a big pile of cash, and there is the possibility that inflation or heavier taxation might strike, wouldn't I be rushing to turn my dollars(which are likely to be devalued or easy prey for the tax man) into products and patents and similar things that are less likely to suffer inflation and are much easier to value creatively when the IRS comes calling?)

Re:Alternate theory:

[phantomfive]

I didn't intend to assert that startups are useless; just that if a VC can't make money by funding startups without a ready supply of 'exits', this suggests that the VC is doing a poor job of picking and cultivating startups that are either worth buying or capable of becoming profitable in their own right.

Good point.

If I am a company sitting on a big pile of cash, and there is the possibility that inflation or heavier taxation might strike, wouldn't I be rushing to turn my dollars(which are likely to be devalued or easy prey for the tax man) into products and patents and similar things that are less likely to suffer inflation and are much easier to value creatively when the IRS comes calling?

Taxes don't normally come on piles of cash........I think what they are really worried about is that the inflation or taxation will cause a recession. I was working with a startup in 2008 that had just hit profitability, and when the recession hit, all their customers dried up and the company closed. That's what you want to avoid.

For larger companies it's a different issue. Normally, for maximum value, a company will borrow money to fund normal operations, because it increases the return they can get on resources. That worked fine until the crash, when it became impossible to borrow enough money in the short term. A lot of companies were perfectly solvent, but they were having trouble making payroll until their customers paid them.

So now a lot of companies are keeping enough cash around to keep running, in case credit dries up again.

Re:Alternate theory:

[SourceFrog]

Two points: One, it's the end of the second tech bubble (in spite of those who have attempted to assure otherwise, we have had a tech bubble), and two, those 'piles of cash' corporations are supposedly 'sitting on' are priced in post-fiscal-cliff dollars, they aren't as much as they seem.

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)

they have tons of money and yet won't invest ?

[etash]

Cleary they have to be wrong. GOP says that people with money will always invest their cash thus creating more jobs.

Re:Good.

[ExploHD]

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...

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:He said asia/canada

[Mitreya]

Your view that doing nothing amounts to "letting the country burn" is itself a very left wing political view.

We do not have a left wing in US. We have a moderate-right wing and a far-far-right wing.

So from the point of view of his political opponents, stopping him at every turn isn't "letting the country burn", it is preventing legislation that would harm the country.

Republicans did manage to block a bill that would fund jobs for veterans on the reasoning that we have no money. Unless these Republicans voted against the wars (very few!), that makes them hypocritical to the extreme.

Obama can spend less, regulate less, withdraw the military, stop engaging in wars or drone strikes, and stop violating civil liberties all on his own without any help from Congress.

Congress is supposed to regulate war, actually. The only reason Obama goes on with wars/drone strikes is because Congress is staying out of it - uniformly so on both R-side and D-side.
Also, Obama cannot spend or regulate or even violate civil liberties -- just about every one of those things (except for "kill list") had passed through Congress.

If Obama wants to negotiate over this, he needs to bring something to the table that his political opponents want, and there is very little that he can offer.

Republicans _could_ come up with something as part of the negotiation. They must want something (and they should be willing to give something in return). If their offer is "here's what we want to do and there is no room for compromise", why should Democrats bargain with them? Would you?

Re:Who could have foreseen it?

[headhot]

Hows austerity working for England, or Europe in general?

http://www.businessinsider.com/chart-of-the-day-us-vs-uk-growth-2012-4

Re:Good.

[Anonymous Coward]

I buy silver. I've actually accumulated enough now where it's hard to lug around. It's cheaper, and works on werewolves.

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.

Re:Decline

[Impy the Impiuos Imp]

Funny, and troll both.

Does anyone else find it interesting, though, that there are serious posts talking about government punishing businesses for failing to invest in a risky environment, to rescue politicians from bad times?

How else to describe it?

Re:Good.

[ExploHD]

and you are correct...

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.

Re:Bullshit

[smpoole7]

> I'm guessing that we're in better shape to do without them than they are to do without us. Fuck 'em.

What terrifies me is that you actually believe that. You're not alone, either.

Re:Bullshit

[metlin]

I'm guessing that we're in better shape to do without them than they are to do without us. Fuck 'em.

Have you ever genuinely tried started a company, and tried to ramp it up? Ever run into a situation where you need capital, and the only way you can succeed is either by taking loans or getting investors? Ever been in a situation where you've sold a lot of what you own for an idea you believe in, and really hope someone out there is willing to pitch in? Ever put in so much of your life into an idea that you're willing to do anything it takes to keep it going forward? Ever look desperately to get out of the red before the money in your account dies out? Ever sold your favorite things so that you would have enough money for one more week? Didn't think so.

Anyone who has ever really been an entrepreneur and has gone balls to the wall will realize the value of investors, angel or VC. I've been on both sides of the fence, and if you really think that, you are an idiot.

Re:Bullshit

[PopeRatzo]

Lol .. the whole meaning of the word "uncertainty" points itself to an unknown as to whether "it can be made" - that's the whole point.

Yes, that's the whole point.

There is risk in starting a company, and "venture capitalists" believe we should relieve them of any risk.

If they don't want to take the risk, there are others who will.

Re:Bullshit

[PopeRatzo]

Uh, that's the point, uncertainty means there is significant doubt that a buck can be made. I thought you would realize this.

Yes, and that's my point too. "Venture capitalists" are the RIAA of business. They want society to indemnify them against risk, and when they succeed they want guarantees that society won't tax them.

If they are adding something to the creative process of business creation, then let them be creative. They want guarantees, but there are no guarantees.

Let's look at a famous private capital company, Bain Capital. Did they risk their own money? No. They created debt. They saddled the companies they "helped" with ungodly amounts of debt and charged hefty fees (which were taxed as if they had risked their own money, which they had not) and then if it worked, they made dough and if it didn't work, they made dough.

If today's "venture capitalists" are risk adverse, then let them sit on the sidelines or move to some Galtian utopia. Somebody else will be happy to take that risk if the rewards are possibly there.

Re:Bullshit

[metlin]

I did not use professional venture capitalists, but a host of loans, and the equity in my home and summer house for capital. I did not give up any equity in the company.

That's like Mitt Romney saying, if you do not have money for college, get it from your parents.

When I had my first startup as a graduate student, I was eking a living making ~$700 a month. A home and a summer house? Yeah right.

If you think most entrepreneurs have that kind of capital at their disposal, either in actuality or in illiquid assets that can be leveraged, you must be smoking.

While I am happy for your success, as someone who's started several companies in the past decade (with no house to leverage for a loan, btw -- so banks will not just lend you money), your thinking only works for those who already have something tangible to bargain with.

Re:GOP Needs to Understand

[phantomfive]

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

Do you realize this is the exact opposite of compromise?

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:Wait until the end of Obama II

[smpoole7]

> Simply, there will be no money.

Getting people to believe that is the trick. It's not Republicans vs. Democrats, either. Both parties have spent more than incoming revenue (albeit on different things at times, and in different amounts).

Case in point: I work in Jefferson County, Alabama. It's bankrupt. (Literally. As in the largest municipal bankruptcy. Ever.) In spite of that, a few months back, the County Commission notes that there are condemned homes from the tornadoes of April 27, 2011. They declare it an emergency and SPEND MONEY THAT THEY DON'T HAVE on the "problem."

There is a fundamental disconnect here. No one wants to believe that the great, the powerful OZ^H^H United States could run out of money, but it could. And as someone else pointed out above, the WORST case would be for the government to just start printing money to cover the shortfall. That will be completely and utterly disastrous.

Trying to explain that to the average guy on the street is the trick. He or she just doesn't -- and WILL not -- get it.

Shoot, the average Guy On The Street has no idea what a sweetheart deal we have a present by having the world's reserve currency. If that should change to the Yen or some other currency, prices are going to skyrocket as well.

Re:financial cliff, but US has 11 aircraft carrier

[whistlingtony]

I'm actually responding to the two anonymous trolls that tried to say that welfare was more than the military budget.

Ahem... Military budget for 2010. 683.7 billion. http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

Or, here's a chart.
http://www.usfederalbudget.us/welfare_budget_2012_4.html
Looks like Defense is twice as big as the welfare budget.

It took me 2 minutes to actually look at the data. I guess the two trolls never bothered to look into their own positions. Shame.

While I'm at it... From Wikipedia

CBO's preliminary estimates indicate the federal government spent $3.54 trillion on a budget or cash basis during fiscal year (FY) 2012 or 22.6% GDP, down 1.6% vs. FY2011 spending of $3.60 trillion. Spending fell across all major categories except Social Security and Medicare.[20]

Yup, Obama is out of control! Face it, Republicans blow up the deficit, democrats fix it. Republicans whining about fiscal responsibility are lying. They're the ones that have blown up the federal deficit with stupid unneeded tax cuts and huge military expenditures. Look at a fancy graph of federal deficits against presidencies.... It's freak'in obvious. Conservatives hate facts...

Lets jump off that cliff...

[Charliemopps]

As much as they're trying to terrify us about this cliff, about the best thing that could happen to this country is if gridlock takes us right over the edge of the cliff. Taxes would go up... Spending would go down... the public would lose even more faith in our 2 political parties and maybe the military cuts would help us decide to pull troops out of at least a few of the hundreds of countries we have them stationed in.

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:Good.

[HermMunster]

Kickstarter projects are making up for it, most certainly.

Re:Good.

[zieroh]

You seem confused, bro. Vulture capitalism is a derogatory term for the private equity industry, not the venture capital industry.

You must not live in Silicon Valley.

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

[Mashiki]

Beh. I'm a fiscal conservative, and to be honest unless you guys get your house in order there won't be much left. It's pretty interesting to watch from up here in Canada. Though never mind that the democrats idea of "cutting to balance" in that case was raising spending by 8%. Sorry the GOP had the right idea of blackballing the democrats on that one.

But hey, you've got all of a month and a half until the largest tax hike in history comes to fruition and kills the poorest economic recovery since the great depression comes into play. Personally from a currency traders pov, you guys have been in a depression since '08ish and all Obama has done has prolong any type of recovery by tinkering like hell with the markets. Using QE only does one thing though, make me more money.

Re:Good.

[alexander_686]

Vulture capitalism is a subtype of private equity.

Private equity(PE) tend to be limited partnerships with a fixed horizon of 10 to 20 years. They tend to specialize.

Venture Capital are PEs that specialize in funding firms that are in start up mode. i.e., are young and not profitable. The idea is provided money and management experience and hit a home run.

Then there are the “distressed” and/or “turn-around” PEs. They will either 1. Come in and turn around the firm or 2. Dismantle the firm and sell it off for parts.

Bain Capital runs both types of funds. Warren Buffett does too. When he invested in Berkshire Hathaway is was in the declining cloth industry. For the next 50 years – well.

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:Who could have foreseen it?

[King_TJ]

I hate these types of comparisons, personally, because I think they miss the bigger picture completely.

Part of the U.S.'s whole problem right now is the desire to patch things back up, post financial crash, to quickly promise people "it's not SO bad" and "We can soon get on with business as usual again!" Meanwhile, the real problems haven't been corrected at all, and we're just setting ourselves up for another, even bigger, fall, down the road.

The "recovery" we're supposedly having right now is pretty much artificial. The Fed pumps a bunch of money back into the banks who screwed up and mismanaged things.... Entire industries that screwed up to the point of going under (like GM) get bailed out to make things look good again, ASAP .... and massive amounts of government (AKA. taxpayer) money gets funneled to such things as TSA agents, Homeland Security staff, and workers hired for road improvement work for a few years.

Before you know it, things are started to look a little bit better again. But it's kind of like a balloon with a bunch of small pinhole punctures in it. They just re-inflate it and say, "See... looks pretty good again now!" but they never patch all the holes.

The bottom line is the fact that government (unlike private business) never does anything that generates a profit. All they can do is tax you or print money, devaluing the money you already possess. And as they keep doing both to blow the leaky balloon back up again, we're all going to suffer for it eventually.

None of this is meant to be some sort of pitch that we needed a Republican like Ronney in office, mind you. I think for one thing, much of this damage has already been done and we're just going to start feeling the after-effects here in the next few years, regardless of who the President is. But further, I really don't think EITHER party will do what it takes to turn this problem around. The most likely scenario is a bunch of attempts to keep patching things and patching things until it all erodes away into a worthless currency.

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.

[amiga3D]

Every time Ron Paul started talking about this stuff on the campaign trail he got booed and everyone promptly stuck their hands over their ears and went "lalalalalalalalala............." I hope it holds together 3 more years so I can cash my 401K out before it's gone. A lifetime of savings and those fuckers are going to cheat me out of it. The sad thing is it's all the fault of the American people who only listen to what they want to hear. This two party shell game is going to end soon and the public will discover that no matter which shell you flip there is nothing under any of them.

It All Went West

[NicknamesAreStupid]

First, Silicon Valley sent the silicon (fabs) to Asia. Then, they outsourced labor to Asia. Then most start-ups needed an "Asian talent connection" (H1-B visa, India/China engineering, etc.) to get funding. Then,the VC set up offices in Asia. Now, those offices fund Asian start-ups. Asia is where the action is, and that is where the money is, too.

Re:Good.

[rs79]

VC's are trending down, Kickstarter is trending up. Isn't this how it should be?

This problem predates the recession

[Animats]

This has little to do with the recession.

I go to occasional VC conferences in Silicon Valley, and get to hear what the VCs are doing. It's not looking good. The VC industry as a whole hasn't made money since 2001 or so. During the dot-com boom, many new venture funds were created, resulting in an influx of dumb money. Most of them haven't been profitable.

The problem is this. Before the dot-com boom, venture capitalists usually funded a startup which was going to make something. So they'd fund a few engineers for a few years, and about 1 time in 10, something good would come out that paid for the unsuccessful tries. This was a good business model and it drove Silicon Valley.

Dot-com startups weren't about technology. They were about marketing and market share. So they had to be funded beyond the R&D phase, well into the growth phase, before the winners and losers became clear. The loss per failure was much higher than when VCs were involved in technology startups.

This model has persisted in the post dot-com era and into the "Web 2.0" era. Most of the ideas one sees at VC meetings are minor variations on popular ideas. I've seen a presentation for a social network for cats. Some innovative technologies are proposed, but often they're not big wins.

About 1 in 10 VC-funded companies makes it big. 2 to 3 in 10 go bust. The rest end up in "zombie mode" - they generate enough cash to pay their expenses, but can't pay back their investors. A big headache in the VC industry is dealing with the growing army of zombies. They're more profitable alive than dead, so they're not killed off, but they're a net loss. There are a lot of half-dead "social" startups around. Tech startups tended to be sold off for the technology or shut down. That's what VCs mean by "lack of an exit".

Re:Good.

[Kohath]

US has the highest corporate tax rate in the world.

Canada top tax rate is 29%, vs 35% in the US (as of 2011). In California, home to a lot of VC-funded companies, high state taxes make this considerably worse. Also, Canadians get health care with their tax payments. In the US, we don't. The Canadian government and the governments in the provinces are more efficient, less corrupt, and much less anti-business than in the US. Your stereotypes about Canada and the US are out of date.

Every EU country and every Asian country has lower corporate taxes than the US. Around the world, the trend has been toward lower taxes except in countries that have enacted austerity plans and in countries with hardening socialist governments, like France and the US.

It's no secret which places are the best ones to invest.

Re:Good.

[sjames]

Read your first link all the way through. PArticularly the part where it talks about effective vs. statutory tax rate.

Likewise, consider the humongous loophole known as capital gains in the U.S.

Re:Good.

[TTL0]

The Goverment never asked for it's money back. They only asked that the auto industry carry Ohio for Obama.

Re:Indeed, they do...

[Trepidity]

Dude, he compromised so much on health-care that he literally passed the Republican health-care plan: it was almost identically the Heritage Foundation / Romneycare plan. As far as I can tell, it included virtually nothing of a Hillarycare-style, Democratic plan. So he basically compromised all the way to their side.

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.

Re:Good.

[demachina]

The issue here is probably that it is a misnomer to say corporations are holding "cash". The big banks (a.k.a. primary dealers) are moving their cash hordes around constantly but I think most of it has been in the stock market and commodities. I imagine most corporations are doing the same. You would have been a complete chump to actually hold cash for the last three years because the value of dollars have been hammered.

The key distinction is between holding your assets in liquid investments or investing it in your business. Companies are NOT investing it in growing their businesses which is what TFA is referring too. Why should they. Over the last 3-4 years it was incredibly easy to get huge returns just buying in to the stock market as it rallied from 6600 to 13000. It was shooting fish in a barrel for them to just ride the wave as the Fed reinflated the stock market by printing money and handing it to the primary dealers. Contrast the ease with making money gambling in stocks and commodities over the last three years versus doing the hard way, investing in your business, doing R&D, making products. Its why unemployment stays high. Its a lot easier to gamble for money these days than it is to work for it.

As for when the inflation happens, as I said, no one knows. Maybe it won't. The problem is always that everyone has confidence in your currency until they don't. And when they lose it, it is usually sudden and ugly.

Another problem is that, since nearly all central banks are debasing their currency, its a complete crap shoot to figure out which currency is safer than all the others. The Swiss Franc has been the hands down choice for most of the last three years but so much money has fled in to such a small country that its severely imbalanced too.

Let's hope we get lucky and can muddle through. One plus to the Fed's money printing is they are replacing wealth wiped out when the housing bubble collapsed. Unfortunately they are replacing money lost by home owners and pension funds who bought mortgage backed securities, with money pouring in to Wall Street, and Wall Street is just using it to fund their gambling addiction, not to build companies or create jobs.