Venture capital moving to the sidelines?

posted at 2:15 pm on October 16, 2010 by Ed Morrissey

Reuters’ economists may have reason to move their already-pessimistic projections further downward.  Yesterday afternoon, a study conducted jointly by Thompson Reuters and Price Waterhouse Cooper shows that venture capital investment dropped 7% in the third quarter, a harbinger of higher unemployment and economic decline:

Venture capitalists poured less money into U.S. startups in the third quarter and split this among more companies, signaling that investors are trying to be more economical with their funds.

According to a study set to be released Friday, startup investments declined 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 startups received funding during the quarter — 9 percent more than the 716 companies that took slices of the investment pie last year.

The study, which was conducted by PriceWaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, said that much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech startups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year — until the third quarter.

The future outlook from the third quarter last year looked more promising than it does now.  Last year, investors expected a normal recovery, albeit perhaps somewhat slower than previous recoveries.  Investment went up in Q3 and Q4 last year in preparation for an expansion that has never arrived.

Now, that future looks significantly more bleak than it did a year ago, as the Reuters projections this week outlined.  Not only has the recovery not been normal, economists now don’t expect it at all in 2011, either.  Thanks to a massive amount of uncertainty introduced by regulation passed by Democrats this year in both ObamaCare and the Wall Street regulation bill — as well as the Democrats’ decision to postpone their tax-rate decisions — investors are getting a lot more cautious about their money, especially on the venture side, where the risk/reward ratios are much less clear than in the last recovery in 2003.

Look at where money did and did not go.  Expansion and later stages of development got more money, but start-ups in the “seed stage” saw a decline in funding of 11%.  Venture capital simply won’t fund much risk in an environment where capital-gains taxes are expected to increase and income tax rates are already scheduled to rise at the end of the year.  Money will go instead into proven enterprises, or more likely into shelters where they don’t provide any economic growth.  And ironically, that means that Barack Obama’s pet “clean” projects will be hardest hit, as reported by Rachel Metz at AP.

If venture capital continues to retreat, we may see another recession rather than the anemic growth predicted by Reuters this week.


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Its now the Fall of Discontent,in the Valley of Tears,
at Hopey/Changets Roman Temple Pillars of Perpetual Hope,
and NeverEnding Change Palace!!

canopfor on October 16, 2010 at 2:19 PM

“Risk is bad. Investors are greedy. Only government can fix this problem.” – Crack White House economic team.

forest on October 16, 2010 at 2:21 PM

A recent article in Chemical & Engineering News examined alternative energy innovation in China. The article has four different entrepreneurs saying “You can’t get this done in the US”. All noted that a regulatory morass stifles progress in the US.

NaCly dog on October 16, 2010 at 2:23 PM

Money Went Galt.

The only way to get rid of the present regime is to starve it out.

Dr Evil on October 16, 2010 at 2:27 PM

A second Great Depression.

rbj on October 16, 2010 at 2:32 PM

“Risk is bad. Investors are greedy. Only government can fix this problem.” – Crack White House economic team.

forest on October 16, 2010 at 2:21 PM

The private sector is generally more incompetent than the public sector.

crr6 on June 12, 2010 at 12:08 PM

Del Dolemonte on October 16, 2010 at 2:33 PM

Gerald Celente

http://www.trendsresearch.com/index.php

Blog
=====
http://geraldcelentechannel.blogspot.com/

canopfor on October 16, 2010 at 2:37 PM

NaCly dog on October 16, 2010 at 2:23 PM

Wait, are you trying to tell me that pretending to have good intentions and pretending to care about people doesn’t automatically suspend all negative economic effects?

/

Kataklysmic on October 16, 2010 at 2:38 PM

Kataklysmic on October 16, 2010 at 2:38 PM

Let’s pretend that an indifferent and implacable universe cares for mere human intentions. ☺

NaCly dog on October 16, 2010 at 2:42 PM

‘Moving’, I’d say moved.

jeanie on October 16, 2010 at 2:43 PM

As the great Lady Thatcher said,

“The problem with socialism is that eventually you run out of other people’s money”

We’re nearly there.

BobMbx on October 16, 2010 at 2:48 PM

“Risk is bad. Investors are greedy. Only government can fix this problem.” – Crack White House economic team.

forest on October 16, 2010 at 2:21 PM

Government is greed.

Inanemergencydial on October 16, 2010 at 2:48 PM

Planting seeds in sterile ground is a fools errand.

midlander on October 16, 2010 at 2:49 PM

“Risk is bad. Investors are greedy. Only government can fix this problem.” – Crack White House economic team on Crack.

forest on October 16, 2010 at 2:21 PM

(Fixed defect in hypothetical quote..)

landlines on October 16, 2010 at 2:50 PM

Planting seeds in sterile ground is a fools errand.

midlander on October 16, 2010 at 2:49 PM

But on Planet Obama, all that counts is the thought. Results are inconsequential.

BobMbx on October 16, 2010 at 2:53 PM

BobMbx on October 16, 2010 at 2:53 PM
But on Planet Obama, all that counts is the thought. Results are inconsequential.

I refuse to even try to get my mind around that. : )

midlander on October 16, 2010 at 2:57 PM

The thing that is really starting to hack me off is these idiots saying, “They didn’t know how they (the government) were going to pay for the tax cuts.”

This is so bassackwards as to be fury inducing!

So, let me get this straight. WE the taxpayers put money into the system. We do not do so voluntarily but at the extortion of these people. Then they give our money to their cronies and friends and themselves.

When tax cuts are proposed, they say they don’t know how they are going to “pay” for those. Here’s a thought:

STOP SPENDING IT ON SIGNS ON THE SIDE OF THE ROAD!

STOP FUNDING ABORTIONS!

STOP FUNDING UNIONS AND CONGRESSIONAL RETIREMENTS!

STOP IT! STOP IT! STOP IT!

And so help me, if I hear one more idiotic Democrat say they have to “pay for” a tax cut, I’m going to scream!!!

UnderstandingisPower on October 16, 2010 at 2:58 PM

But on Planet Obama, all that counts is the thought. Results are inconsequential.

BobMbx on October 16, 2010 at 2:53 PM

And the message! You forgot the message…

All that counts is the thought and having the right message. Results and reality are inconsequential.

UnderstandingisPower on October 16, 2010 at 3:00 PM

But at least we will have an economy that is fair–no soup for everyone.

Dhuka on October 16, 2010 at 3:02 PM

The private sector is generally more incompetent than the public sector.

Wrong, private sector incompetence results in unemployment and/or bankruptcy. Whereas the public sector has tenure and is rewarded in spite of incompetence. Of course the exception is when the govt. intercedes and “bails out” members of the private sector, thus rewarding malfeasance and incompetence at pretty much the same level as the public sector.

Think not? I give you Fannie Mae and Freddy Mac, where tens of million of taxpayer dollars was paid to officers and directors who didn’t realize they had a problem!!!

Then of course there’s the splendid example of our school & transport systems and public sector boondoggles such as the DMV and Social Security field offices.

The current mortgage mess created by bailed-out banks is a prime example of public sector incompetence layered over private sector. They should have been allowed to fail.

BJM on October 16, 2010 at 3:06 PM

(Fixed defect in hypothetical quote..)

landlines on October 16, 2010 at 2:50 PM

That was exactly my thought.

Isn’t it wonderful to have unexperienced business theoreticians in charge of the government?

This fall, it’s less an election than it is an elementary math quiz for the American public. The grade is Pass / Fail.

beatcanvas on October 16, 2010 at 3:07 PM

And so help me, if I hear one more idiotic Democrat say they have to “pay for” a tax cut, I’m going to scream!!!

UnderstandingisPower on October 16, 2010 at 2:58 PM

Exactly — extending the Bush tax cuts for all could not possibly add to the deficit EXCEPT that they already allocated money to be spent that wasn’t theirs to be begin with.

Greyledge Gal on October 16, 2010 at 3:10 PM

Fellow Hotheads, hang tough. There will come a day when the gates will be opened. Right now they’re closing/closed. This is the time to develop ideas, to brainstorm, to think big and wear out some pencils and scratch paper over beers. Entrepreneurs can only be kept down for so long and one day, and I hope I’m among them, the gates will open and we will run free.

ted c on October 16, 2010 at 3:34 PM

No worries. Obama will simply exert an executive order, and just TAKE the money from investors, and invest it as he sees fit. Or he’ll let Frannie Mae do it, since he handed them the TARP money. *sigh*

capejasmine on October 16, 2010 at 3:35 PM

WOW this was really hard to see coming.

You want evidence the recovery summer has passed, visit your local mall and count the shuttered stores.

tarpon on October 16, 2010 at 3:36 PM

This is the most important econ post Ed has written. Jobs come from new businesses and growth. With the economy not growing, who’s going to do venture capital; it’s already risky as hell. Want to see growth and jobs; eliminate capital gains for investment in new companies and venture capital, not for regular, long term investments.

BTW this is why I never understood why Seattle, Austin and the Silicon Valley are as liberal as they are. Yes, they’re socially liberal, but even their democrats are nuts on econ matters.

TimTebowSavesAmerica on October 16, 2010 at 3:49 PM

Amazing. That there is still that much capital in play, that is.

Smart money should stay on the sidelines until Obama is effectively hogtied – this means AFTER the government shut-down he will cause in his fight to turn us into a Marxist nation.

Republicans need to be smarter than Gingrich and Dole, see what is coming, and begin laying the groundwork and public perception to blame Obama for the shutdown beginning November 3rd. He must be seen as continuing to govern against the will of the people, as the enemy of sane government and of American principles.

Adjoran on October 16, 2010 at 3:54 PM

After January 1, 2011 gains on venture capital is treated no different than regular capital gains. A company might as well buy gold or real estate as put it into a startup. The Democrats have made move after move guaranteed to ruin this economy. It is as if they have purposely taken actions to destroy the economy.

The preferential tax rate for venture capital disappears. You are going to find a lot of venture investors cashing in their gains this year and not making any more investments.

HINT: The world leader in venture capital investment right now is Israel. The venture capital companies are investing there.

crosspatch on October 16, 2010 at 3:57 PM

If venture capital continues to retreat, we may see another recession rather than the anemic growth predicted by Reuters this week.

Exit question: Will the “new” recession still be Bush’s fault? Or will the MSM properly label it “The Democratic Recession”?

GarandFan on October 16, 2010 at 4:14 PM

tarpon on October 16, 2010 at 3:36 PM

Or check out a walmart parking lot on the weekends. Where once, EVERYONE did their shopping on weekends. Now? They hardly fill up the parking lot, no matter what time of day, or day of the week. At least at my local walmart.

capejasmine on October 16, 2010 at 4:21 PM

Obama spoke out against tax cuts today.

http://news.yahoo.com/s/ap/us_obama_taxes

dogsoldier on October 16, 2010 at 5:02 PM

Now, that future looks significantly more bleak than it did a year ago, as the Reuters projections this week outlined. Not only has the recovery not been normal, economists now don’t expect it at all in 2011, either.

Some of us haven’t expected recovery to happen during Obama’s reign since it became obvious that he would be elected during the summer of 2008.

burt on October 16, 2010 at 5:03 PM

•Institutional investors fear a government policy mistake far more than inflation, terrorism, a housing double dip, a weak dollar, poor earnings or any other potential risk to the economy, according to a survey of 100 mutual fund, hedge fund and pension fund managers by Citigroup Global Markets. “Government Policy Missteps” garnered more than a third of the votes. Another 15 percent cited “Protectionism,” which is also strongly-tied to the actions of the White House and Congress.

http://www.usfunds.com/investor-resources/investor-alert/
Some of you are pissing into the wind with your expectations of recovery.

burt on October 16, 2010 at 5:11 PM

…and Obama promises to punish the job creators…and the sheeple applaud.

Either he’s economically ignorant or he is a socialist/commie, hell bent to destroy the American system.

What a malicious arrogant fool was elected to lead a once great nation, the beacon for the world.

Schadenfreude on October 16, 2010 at 5:14 PM

Del Dolemonte on October 16, 2010 at 2:33 PM

I’m not questioning your integrity, but he really said that? He/she really is a knuckle dragging drooling idiot if that’s true.

Ann NY on October 16, 2010 at 5:37 PM

…much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech startups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately.

Alt energy funding has always been mercurial because of the legislative risk involved. I’d wager this has more to do with the fate of Cap & Trade than the overall economy. VCs are waiting for the election results to see where best to put their money.

Heywood U. Reedmore on October 16, 2010 at 5:39 PM

the beacon for the world.

Schadenfreude on October 16, 2010 at 5:14 PM

Vesta’s fire is well and truly out. All hope now rests on Vulcan.

OldEnglish on October 16, 2010 at 5:40 PM

By the way, Venture Capital has been growing more conservative in the last few years. For instance, it’s been much easier for software companies to get money than hardware companies – even though it’s not good for software that there have been very few advances in hardware in the last 15 years.

Ann NY on October 16, 2010 at 5:46 PM

This article makes me very sad. I am actually the CEO of a clean startup company. Actually we are almost 4 years into this. We have an LOI with a company that completely makes the high concentration farm animal waste to where it is not harmful to the watershed. We are seeking funding. We will have a positive cash flow within 18 months, and the gross margin is over 50%. We have the ability to change farming as we know it from this treatment process because the fields where this treated manure has been spread for fertilizer has increased crop yields 30% over the past 3 years. We convinced this company to sign an LOI with us because we are public, thus offer investors more liquidity than they had, being a private company. While I did not vote for Obama, who knew that his complete lack of knowledge in how real capitalism operates would seriously impair our ability to actually get a “clean side of green” company up and running WITHOUT government funding (we don’t want to try to get any, we prefer to avoid that option completely).

We have the answer to the problems of high concentration farm animal production and I would hate for it to never happen because our current administration has ZERO private industry experience and has never created a job in the private sector. They just don’t understand how these past 24 months (since he election) has killed our economy.

And this is why I am so puzzled that generally the wall street types voted for the Democrats. I just don’t comprehend the election dynamics in this economic sector.
Sigh.

karenhasfreedom on October 16, 2010 at 6:21 PM

who knew that his complete lack of knowledge in how real capitalism operates would seriously impair our ability to actually get a “clean side of green” company up and running WITHOUT government funding
karenhasfreedom on October 16, 2010 at 6:21 PM

Oh, a large fraction of the people who comment here.

burt on October 16, 2010 at 6:38 PM

Venture capital in the country has been on life support since the expensing of stock options and the infliction of SarbOx. This pleases the Left, which is trying to write the Do Not Resuscitate order. Why, they ask, should anyone be allowed to create new businesses, serve customers, and get rich? Unless they are union bosses, of course.

njcommuter on October 16, 2010 at 9:09 PM

I just went to work in a supervisory position for a mechanical contractor that started up just a year ago. The owners are positioning themselves to be ready when we remove the communists from power and get rid of the shackles they’ve placed on the economy.
When that happens people that put themselves in the right place are going to be riding a rocket. I plan to be firmly strapped in.

single stack on October 16, 2010 at 9:38 PM

Thanks to a massive amount of uncertainty introduced by regulation passed by Democrats this year in both ObamaCare and the Wall Street regulation bill — as well as the Democrats’ decision to postpone their tax-rate decisions — investors are getting a lot more cautious about their money…

Ed, how many silicon valley VC did you interview for this article? I think you’re simply inventing a story. The vast majority of venture capitalists, like John Doerr, would strongly disagree with you. Many support Obama. Uncertainty about tax rates changing a few percentage points isn’t a concern. VC are much more worried about the future solvency of the government (ie federal debt) than marginal tax rates.

First, SarbOx needs to be repealed. Second, if you want to understand what’s driving down venture capital money, then you need to realize how the huge stock market losses of the last 3 years are forcing many institutional investors to re-balance their assets.

BTW this is why I never understood why Seattle, Austin and the Silicon Valley are as liberal as they are. Yes, they’re socially liberal, but even their democrats are nuts on econ matters

You’re right, the venture capitalists who are entrusted with billions of dollars in capital are ‘nuts on econ matters’. It’s amazing that you can be so arrogant to think you know more than venture capitalists. Could it be that the great capitalists like Warren Buffet, Bill Gates, Larry Ellison, and many VC all realize that low taxes on the rich lead to higher deficits, a poorer middle class, and NO real job growth? The last 8 years provide enough data to answer this question. It’s not rocket science.

bayam on October 16, 2010 at 9:47 PM

A second Great Depression.

rbj on October 16, 2010 at 2:32 PM

That’s what some VC are saying.
http://www.techcrunch.tv/watch?id=A2NWluMTqftdfMCDVVy14XjaU8Ggdr1g

bayam on October 16, 2010 at 9:55 PM

Venture capital in the country has been on life support since the expensing of stock options and the infliction of SarbOx. This pleases the Left, which is trying to write the Do Not Resuscitate order. Why, they ask, should anyone be allowed to create new businesses, serve customers, and get rich? Unless they are union bosses, of course.

njcommuter on October 16, 2010 at 9:09 PM

Absolutely, SOX has probably cost our company 150K in expenses in 2 years, and we only generate 600K right now in gross revenue per year. SOX has created an awkward wall between the auditors and our company where we are entrepreneurs and operations type of people, not trained CPAs and Auditors. Sometimes we have questions that would clearly make the audits smoother, but they aren’t supposed to help us with the financials until after we present them to them for the audit. At least that is what it seems like from my internal perspective at the helm. The attorneys, auditors, etc, just from SOX has probably burned through 60% of our start up costs. Too bad we have so many top priorities in the new Congress because SOX alone would probably lower the unemployment rate by 2 points, minus all the accountants and CPAs it would throw out on the street. It might be a good start.

We don’t have stock options because we don’t even understand the tax treatment, it just doesn’t make sense.
However we are not really typical, we started up with the intent to be public as quickly as possible and then do growth by acquisition. Again, we started this whole thing 4 years ago, before the meltdown, etc. We got our trading symbol in September of 2008. How is that for timing?

karenhasfreedom on October 16, 2010 at 10:49 PM

who knew that his complete lack of knowledge in how real capitalism operates would seriously impair our ability to actually get a “clean side of green” company up and running WITHOUT government funding
karenhasfreedom on October 16, 2010 at 6:21 PM
Oh, a large fraction of the people who comment here.

burt on October 16, 2010 at 6:38 PM

I was attempting to be sarcastic here. I kept telling all the Obama ether sucking Obamabots in 2008 that this guy had no real life experience and didn’t understand business economics and should never be on a ballot for anything. I have to refrain my “I told you so, neener neener” sneers now.

karenhasfreedom on October 16, 2010 at 10:51 PM

I dropped something today and it fell toward the earth. Weird.

mankai on October 16, 2010 at 10:59 PM

many VC all realize that low taxes on the rich lead to higher deficits, a poorer middle class, and NO real job growth? The last 8 years provide enough data to answer this question. It’s not rocket science.

That’s just stoopid.

single stack on October 17, 2010 at 1:29 AM

karenhasfreedom on October 16, 2010 at 10:51 PM

My mistake. Sorry.

burt on October 17, 2010 at 8:57 AM

If you haven’t bailed out of the US market yet, DO IT NOW! Sure you will probably miss a nice bounce if the R’s win big (although much of that is already priced in by now anyway), but you risk much more on the certain down side. Art Laffer has been ringing the clarion about the effects of the failure to extend the Bush tax cuts and he is one dude I wouldn’t argue economics with!

There is no way that the lame ducks are going to rescue the situation and it may be well in to next year before PeeBow finally gives in and grudgingly allow the evil rich to keep there tax cuts. A lot of damage and misery will take place before he capitulates.

MJBrutus on October 17, 2010 at 10:48 AM

That’s just stoopid.

single stack on October 17, 2010 at 1:29 AM

Then I guess Warren Buffet, Bill Gates, Larry Ellison and a large percentage of VC are stupid. Or maybe you aren’t as pro-capitalism as you claim to be.

bayam on October 17, 2010 at 3:25 PM