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

[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

[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

[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

[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.

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?

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

[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"

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: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!