The economy has been incredibly challenging for companies in general, but it has been even rougher on venture capitalists hoping to realize returns on some of their most mature investments. From the New York Times:
In the second quarter of this year not a single company backed by venture capitalists has gone public. It is the first time that has happened since 1978, according to industry group The National Venture Capital Association.
The other bad news was the industry’s disclosure early Monday morning that acquisitions of venture-backed companies are down sharply, too. In the second quarter, 50 mergers or acquisitions of venture-backed companies were completed. That’s down from 70 in the first quarter.
General weaknesses in the financial markets have kept many companies from taking the plunge. But venture capitalists say they have started to back technologies like alternative energy that take relatively long to gestate before they are ready for the public market.
Wall Street is being very selective in taking companies public, and blessing only those with particularly high revenue and growth projections. And venture capitalists are wary because they worry that their returns will be limited in a depressed market.
Some venture capitalists are arguing that the pipeline for public offerings has dried up in part because of the considerable shift in the industry’s interest in the last three years into “green” technologies, which was taking time to bear fruit.
But Paul Kedrosky, an investor and the author of Infectious Greed, a venture capital-centric blog, said that there were deeper, more systemic problems for venture capitalists in addition to the cyclical challenges. He said part of the problem was that the industry was backing companies that lack widespread investor appeal, like YouTube clones and dating and social networking sites.
“There is nothing that the industry is producing that investors want,” Mr. Kedrosky said. “The stuff they’re investing in is idiosyncratic — it’s fun and appealing to them but Wall Street doesn’t care.”
Mr. Kedrosky said the problems were particularly acute for venture capitalists — and that leaves them with some answering to do to their own investors.
“Here’s an industry struggling in a big way to hang onto its investors, let alone find new ones,” Mr. Kedrosky said. “They’ve been hanging on by their fingernails.”
The lack of a good way to cash out just makes things worse, he said. “There is no venture industry if there is no I.P.O. market.”
It is interesting that Web 2.0/social media continue to be viewed as sexy but lacking in a definable revenue model. For all their pervasiveness, and Facebook's $15 billion valuation, there hasn't been a lot of monetization of the platforms beyond Youtube and MySpace.
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