Venture Capital Down 50%. It’s Not Just the Recession, Folks.

Comment

6a00d8341c583d53ef00e54f4282dc8834-640wi1

There’s a huge difference between what venture capitalists say and what they do. For much of the last decade some of the same partners that keep saying Silicon Valley will never decline as the startup epicenter of the world are spending every month flying to China. And of course in the post-2000 years every partner said, “Oh we never really got into that whole dot com thing…” Huh. Wonder who did all those deals?

Another classic is this one: “Recessions are the best times to start companies! We always invest in downturns! There are fewer competitors, and you get a better caliber of entrepreneur! Dollars can stretch further because salaries and rents are lower! We’re not looking to take a company public for years, so why would we run our companies based on the public markets and macro economy?”

Bullshit. It fell off a cliff in 2001 and 2002 and it’s falling off a cliff now. (More on that in a second.) But there’s a difference: Funding levels, returns and the percentage of that money going to new ventures never got nearly as high as they did in the 1999-2000 years. So when we talk about steep drops, we’re talking about less of a bubble bursting and more of an industry correcting for more than a decade of scale and liquidity issues.

And make no mistake—it’s a steep drop. Venture funding fell by 50% nationally from the first quarter in 2008 to the first quarter of 2009, totaling to $3.9 billion, according to Dow Jones Venture Source. That’s the lowest total since 1998. PricewaterhouseCoopers and the National Venture Capital Association had it falling farther to $3 billion.

1q-09-vc-deal1

Information technology investments fell 53% year-over-year to $1.7 billion—the lowest since 1997, and the lowest volume of deals since 1995. And clean tech? Well so much for that being the future of the U.S. economy: It fell by 74% to a paltry $117 million. (These numbers according to Dow Jones, see the numbers from PWC/ NVCA in the chart below.)

1q09-vc-internet_clean-tech-deals

The results are so different than what we saw in the last downturn that I could spend eight posts writing about them. But I’ll distill my take-aways to three points for now.

1.   Don’t be fooled: This is not just about the recession. Investments in startups declined in the last downturn, but investments in VC firms didn’t fall nearly as much. Mostly it was the firms themselves deciding to raise smaller funds. That means venture capital as an industry never had a shake-out from the go-go 1999-2000 era. It’s no secret and every VC will admit it: There are a lot of clowns still throwing around a lot of venture money that have no business doing it. (Of course, it’s a well-known industry joke that no one thinks he or she is the clown.)

Returns, on the other hand, did go down. And they never really got back up, given the amount invested. But the industry is graded on a ten-year time horizon so that didn’t matter much. Once returns from 1999 and 2000 fall off that scale, it will. Returns will look at or below the S&P 500 for what is supposed to be a niche, high-risk/high-reward asset class. It takes forever to correct because fund cylces are so long, and the asset class is so illiquid. But it won’t go uncorrected, and the witching hour is getting close.

What does this have to do with money going out to startups? VCs are scared for the first time in a long time. There’s no obvious high growth sector of the tech economy, and their investors are hit in nearly every nook and cranny of their portfolios. They’re not sure how to do their jobs anymore when nothing can go public and acquisitions are few and far between.

This is why the amount has fallen so precipitously, especially in Silicon Valley. In past cycles, VCs have pulled closer to home, and the percentage of money going to Valley startups has increased even as the volume of total deals has gone down. Not this time. According to Dow Jones, Bay Area deals fell by 57%– a faster rate than the rest of the country. In clean tech just one deal was done in the Valley.

Now, this could point to a savvier Valley entrepreneur who saw the downturn coming. After all, most of the well-known Web 2.0 names like Ning, Slide, Facebook and LinkedIn raised huge rounds just before the economic crisis hit, just in case. That could have artificially boosted the 2008 numbers and artificially lowered the 2009 numbers. We’ll have to see how the next two quarters shake out. I expect higher volume of deals in the next few quarters, but also a surge in recapitalizations.

More concerning is the free-fall in the percentage going to new deals. During the last downturn it fell to 24%– down from more than 50% during the go-go days and 33% historically. They never got much above that. In the first quarter only 18% of deals went to new companies, according to Dow Jones.

2.   Revenge of the steady-eddy. What didn’t fall, comparatively? Health care and investments in New England. Both have become the reliable base hits of the venture business. When it comes to healthcare, the vast majority of exits are licensing deals with big pharma or IP acquisitions of device companies. There’s almost zero expectation of anyone going public–even in better days– because Sarbanes Oxley has cut off the ability for small market-cap companies to go out. The next Genentech? Don’t hold your breath.

Similarly, most Boston VCs never really got the consumer Web. Much of their expertise has remained in areas like telecom and healthcare, and many of their investors have morphed into more financial engineers than company builders. This meant that New England fell from the no. 2 region for venture investment for the first time in 2008, as Southern California and New York ascended. It’s now solidly back at no. 2 and investments fell a comparatively tiny 16% in the first quarter, according to Dow Jones. 

3.   Bye-bye Clean Tech Hyperbole. It’s not that clean tech isn’t a huge opportunity. It’s not that it isn’t an important opportunity. But I’ve never believed it was the next wave equivalent to the personal computer, as several VCs and even President Barack Obama said during the campaign. For one thing, there’s a lot of science that needs to be developed, huge amounts of money that need to be injected, and more government cooperation and subsidies than the US currently has. It’s just not the type of investing that most VCs addicted to the crack of quick-to-market, hyper-growth Internet companies can adjust to. Maybe in another ten years, but it’s not the venture guys’ salvation anytime soon.

Hang in there, startups. Take a hike, clowns.

 

http://widget.icharts.net/icharts.swf

http://widget.icharts.net/icharts.swf

http://widget.icharts.net/icharts.swf

More TechCrunch

Founder-market fit is one of the most crucial factors in a startup’s success, and operators (someone involved in the day-to-day operations of a startup) turned founders have an almost unfair advantage…

OpenseedVC, which backs operators in Africa and Europe starting their companies, reaches first close of $10M fund

A Singapore High Court has effectively approved Pine Labs’ request to shift its operations to India.

Pine Labs gets Singapore court approval to shift base to India

The AI Safety Institute, a U.K. body that aims to assess and address risks in AI platforms, has said it will open a second location in San Francisco. 

UK opens office in San Francisco to tackle AI risk

Companies are always looking for an edge, and searching for ways to encourage their employees to innovate. One way to do that is by running an internal hackathon around a…

Why companies are turning to internal hackathons

Featured Article

I’m rooting for Melinda French Gates to fix tech’s broken ‘brilliant jerk’ culture

Women in tech still face a shocking level of mistreatment at work. Melinda French Gates is one of the few working to change that.

16 hours ago
I’m rooting for Melinda French Gates to fix tech’s  broken ‘brilliant jerk’ culture

Blue Origin has successfully completed its NS-25 mission, resuming crewed flights for the first time in nearly two years. The mission brought six tourist crew members to the edge of…

Blue Origin successfully launches its first crewed mission since 2022

Creative Artists Agency (CAA), one of the top entertainment and sports talent agencies, is hoping to be at the forefront of AI protection services for celebrities in Hollywood. With many…

Hollywood agency CAA aims to help stars manage their own AI likenesses

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

3 days ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

3 days ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies