Venture Capital Investments in Crisis time!
February 14, 2010 at 1:15 pm 1 comment
Many people think that investing in new businesses has great future profits when the economy is in a downward move because in times of downward markets or hard economic conditions many costs for start-up businesses and new investments are low. Well it could be right only if you have the money to do so. If we review employees’ salaries and the cost of buildings and equipments this is true but what really is happening is that many investors are stuck with liquidity problems.
Let’s focus more on the Venture Capital industry; if we compare the numbers from 2008 to 2009, we will find a 50% reduction in venture capital investments within that time frame. According to Dow Jones Venture Sources, in the beginning of 2009 the venture capital investments reduced to 3.9 Billion US$ from 8 Billion US$ just one year earlier. So if you thought that Silicon Valley will never enters into recession, think again because it sure did and did it twice. The first time was in year 2000 with the net bubble and the second time was by the end of year 2008 with the economic crisis. What is interesting is that even at the highest level of investments in Venture Capital industry in the last 9 years, which happened at the beginning of 2008, that high level of investment never reached the highest level of Venture Capital investments in history that happened in years 1997 and 1998.
Last year the investment in all Venture Capital sectors was down except for Venture Capital investments in energy efficiency. Although the Venture Capital industry is combined with huge profits in the mind of many investors but it come with high risk levels. One of the most important factors in any Venture Capital investment is which project to choose? because the success rate is very low ranging from 2-10% of all projects. The interesting thing is that these 2-10% of all Venture Capital projects usually come with huge profits that will not only cover the expenses of all other projects but in additional to that make extra profits that many investors would like to have. Not only the decision of which project to finance is hard but also the evaluation process of a Venture Capital is also hard because of lack of comparability to similar project since the project is new and some times the only one. In 2010 the venture capital market will be tight but most likely better than 2009.
Entry filed under: Finance & Investment. Tags: Energy Efficiency, Venture Capital.
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J. Anthony Miguez | April 22, 2010 at 12:19 pm
Other things to consider when trying to compare the VC activity over time are the changing focus of the investments as different sectors require different levels of early stage funding and the lower current cost of many of the activities/technologies used to grow a business. Combine these two elements with the fact that the VC model has gotten smarter along the way and some of the reduction in investment could be expected. With a bit more time it will be interesting to see the ultimate return from period to period since, as we learned in 2001, more is not necessarily better.