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Forget About Venture CapitalBy Rob Spiegel When it comes to launching a company or expanding your business, there are only a few sources for the necessary capital. One is the change in your pocket. Another is borrowed money. And lastly, you can turn to the investment community for venture capital. The wonder of venture capital is that you don’t have to dig deep into your pockets or the coffers of your company, and you don’t have to pay it back. Unfortunately, the market for investment capital has recently fallen to a five-year low. Venture capitalists are still feeling the deep burn of the dot com bubble burst. Venture firms are staggering from eight straight quarters of negative returns and two back-to-back years of losses exceeding 20 percent annually. That’s a big difference from the heady dot com year of 1999 when the average venture capital company delighted in returns that exceeded 166 percent. No wonder companies were so eager to raise funds and throw them at any fuzzy dot com idea in a college drop-out’s head. The past three years have produced dismal numbers for the venture community. The average valuation of a start-up at the end of 2000 was $85.8 million, according to an industry report by Thomson Venture and National Venture Capital Association. That average valuation has now dwindled to $35 million. In this nasty environment, venture investments are at their slowest pace in nearly five years. According to a recent report from PricewaterhouseCoopers and Venture Economics for the National Venture Capital Association, fourth-quarter 2002 investments were $4.2 billion, a 49 percent drop from 8.2 billion at the same time in 2001. In all of 2002, venture capitalists invested $21.2 billion, which was the lowest level of annual funding since 1997. By contrast, ventures companies anted up a stunning $162 billion for start-ups and expansion during 1999 and 2000. And as they pushed that money to entrepreneurs, they were simultaneously grabbing more to invest. Though venture capitalists are timid in this current environment of prolonged losses, their reluctance to invest is not for lack of funds. Many venture firms went on a binge of fund-raising in the late 1990s, and as the tech boom crashed, a good pile of cash was left at the sidelines. Now, venture capitalists collectively still have roughly $85 billion in funds that haven’t been invested. The amount of money individual companies receive in venture capital has also contracted with the downturn. In early 2000, venture firms invested an average of $13 million per startup. By the end of 2002, the average investment had fallen to roughly $6 million. In this dreary investment atmosphere, dot coms have become a pariah. Many of the super-funded Internet companies have yet to completely collapse. Some had collected huge stashes of cash, so they continue on, profitless, living off those doomed investments. Over the next couple years, hundreds of these companies will finally write their last payroll checks, delivering even more losses to their benefactors. Though dot coms are dead, software companies are still gobbling up a good share of the small pile venture capital still available. Software has claimed the top venture spot for 10 of the past 12 years. The irresistible lure of software is that once the company has invested in programming for its core product, continuing investment is rather slight in comparison to the potential returns. Microsoft is the class example. Unlike the hardware-heavy Apple, Microsoft stuck entirely with software and delivered unprecedented margins that could be sustained over decades. So if you’re an entrepreneur who wants to launch or expand, the hurdles you need to jump to gain venture capital are substantially higher than they were just a couple quick years back. And the amounts of cash available are not what they used to be. In this environment, savings, cash flow and borrowing may be the most viable source of capital for a startup or business boost. You may have to scratch venture capital off your list of investment possibilities. Rob Spiegel is the author of Net Strategy (Dearborn) and The Shoestring Entrepreneur’s Guide to Internet Start-ups (St. Martin's Press). You can reach Rob at robspiegel@comcast.net. |
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