Venture Capitalists' Failure to Make Money is a Problem for Entrepreneurs

A 4.3% return on the 5 year funds is quite low indeed.

I think the problem is that VCs aren't investing nearly enough in mobile social music local search review aggregators.

If all else were equal, I would agree. Less money to invest means less money invested.

However the cost of doing a startup has also gone down. By more than the availability of venture capital. Therefore more startups can get going. Also companies like Facebook and Google have more willingness than companies had in the past to buy small companies that otherwise might be looking for venture capital.

When you put these factors in, it is not at all clear to me that the situation is worse for entrepreneurs.

Several people have remarked that this doesn't seem to be affecting technology entrepreneurship much, which seems true from what I've seen of software technology startups in my area. However, not being able to get funding profoundly impacts other types of startups that have higher initial/research/production costs: green energy, manufacturing, basically anything that isn't just a website and iPhone app. And that's really a bad thing, because it seems that far too many entrepreneurs are now going the cool webapp/facebook plugin route because there's a seemingly high potential for profit in the area. But honestly, we need non-software startups too, and for that we need venture capital!

Lack of huge upfront $$ to cloud an idea's success is not a problem.

I think it is good for a CEO to start from scratch (relative term, but..), since it teaches some important core business principles that many seems to be oblivious to. Like, make more money than you spend. Immediately.

One of the things I really enjoy that comes out of 37Signals is their Bootstrapped, Profitable, & Proud Blog.

Those posts hit the spot every time for me.

I admit that what follows is tangential to the post. However, as a freelance developer who, of late, works for startups, I've been mulling this a great deal.

Startups are acquiring money from somewhere. While VCs may be raising less funds and funding fewer startups, the demand for technical hires is soaring! In my particular areas of expertise, Ruby and Ruby on Rails, demand seems, frankly insane.

So what's going on? If there's less VC money in play, unless people are exiting the software development market faster than new people are coming in, one would expect that we software developers would be suffering employment issues like the rest of the US.

And yet I know extremely few Ruby on Rails developers who are wanting for work.

Is it perhaps that my perspective is limited? I know a fairly large group of developers. The only ones who are looking for working (and we're always looking for that next gig) are freelancers.

Is this the Google/Facebook "brain-drain" effect at work? That these megaliths have hired so many of the talented people that, despite reduced VC funding, startups are still suffering hiring issues?

What gives?

It's not very surprising that new investment into funds would tick down a bit in 2009, the year they are discussing. These investments aren't made on the spur of the moment, and the planning period of 2008-2009 was dead in the middle of the largest economic downturn in 80 years. All sorts of people took money off the table while they watched to see what would happen. It's actually more surprising that they point out various metrics that "hadn't been this low" since 99/97 etc - those were of course grand days for venture capitalists.

The article notes an uptick in 2010. With all of the stories about money chasing deals, big early valuations and term sheets being brought to first meetings, I'd bet that uptick is probably a bit more than slight.

The effect of individuals bypassing funds and investing directly in early rounds shouldn't be overlooked. The article is very dismissive of the practice, but it is taking its queues from research done by an association with venture capital in it's name...

The majority of the statistical data used to support the article's thesis is from 2009. The effects of the financial crisis of 2008 obviously had a major impact on investment decisions and results. If we choose a different metric for how to measure the opportunities for entrepreneurs, real world economic potential, the ongoing growth trends of social networking services, new internet based businesses like Groupon, and the explosion of mobile device app markets demonstrate that tech sector investments still have massive upside potential.

The "angel investors won't make up the slack" part wasn't totally convincing. It might be true, but quoting average investment by a single angel versus a single VC isn't really the important number. It'd be more convincing to see aggregate figures: total VC dollars are down $x billion, are angel dollars up more or less than that amount? The article quotes figures for total VC dollars, but none for total angel dollars.

Congress badly damaged public capital markets with Sarbanes Oxley, which is stifling the most important exit avenue for startups-- the IPO.