Venture capital struggles to adapt to new challenges

15 May 2009

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Venture capital firms invested only $3bn in new companies in the US during the first quarter of 2009, the lowest investment level since 1997. This represents a drop of 47% from the fourth quarter of 2008 and 61% from Q1 2008, according to the National Venture Capital Association (NVCA).

What's next? According to CEO and co-founder of global venture firm NEA, Dick Kramlich, "It will take a 'Netscape moment.' An emerging company with a technology that is so arresting, that has been proven, and is in an early phase of growth. And, then, an underwriter who says, 'this will be a big company.'"

Indeed the industry continues to struggle with the after-effects of the dotcom bubble, with even top-tier funds continuing to rely on Google-like homeruns, rather than a steadier stream of strong performers. This may be down to frozen public markets, which have forced venture players to increasingly rely on trade sales for exits. In Europe, this has until recently been made difficult by the weak dollar, putting erstwhile hungry US corporates at a disadvantage and making European companies look expensive.

This is changing, with a stronger dollar creating new opportunities not just for exits, but for corporates with venturing arms.

"Corporates who invest from their balance sheets don't have the dynamics of the LP situation," says Intel Capital president Arvind Sodhani. "We are investing globally and supporting companies in their needs. Remember that most of the GPs in China and India raised their capital from US and European LPs. There are plenty of LPs who have made it known: 'Don't come to us for funding.' Portfolio companies will come to us because we are able to finance. Everything in the economic environment suggests that it won't change much for the rest of the year."

See venture feature on page 18.