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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.'"
Investors may have to make their returns by the companies they invest in making successful products that people want to buy. Disaster.
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?
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.
People who say "sheeple" have about as much sophistication as an AOL user, and in fact are probably actually AOL users.
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?
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.
Have gnu, will travel.
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)
The best thing about a boolean is even if you are wrong, you are only off by a bit.
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.
Atlas stands on the earth and carries the celestial sphere on his shoulders.
Hows austerity working for England, or Europe in general?
http://www.businessinsider.com/chart-of-the-day-us-vs-uk-growth-2012-4
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.
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.
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.
You are welcome on my lawn.
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.
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 $3.60 trillion. Spending fell across all major categories except Social Security and Medicare.[20]
Yup, Obama is out of control! Face it, Republicans blow up the deficit, democrats fix it. Republicans whining about fiscal responsibility are lying. They're the ones that have blown up the federal deficit with stupid unneeded tax cuts and huge military expenditures. Look at a fancy graph of federal deficits against presidencies.... It's freak'in obvious. Conservatives hate facts...
This is the time for compromise.
Obama is willing to compromise, as long as he gets everything he wants.
Ah, projection... What Republicans do to others, they imagine is being done to them.
The Republicans should have taken the offer they got out of Obama last year, now they'll have to settle for something they like less.
Do what thou wilt shall be the whole of the Law
The decline in VC spending did not start on November 7, and is not due to feverish fears of Obama. It dates to earlier this year at the latest, and is more related to spectacular flops in Bubble 2.0, stuff like Zynga's IPO going down in flames. It's not really Obama's fault that a lot of the tech bubble companies have no business plan.
10 PRINT CHR$(205.5+RND(1)); : GOTO 10
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!
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.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
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.
@de_machina
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.
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".
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.
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.