It was back in October, with the financial industry melting down and Halloween coming up, that Sequoia Capital delivered its notorious “R.I.P. Good Times” economic report to portfolio companies, scaring startup CEOs into a wave of layoffs.
So it was hardly a surprise when the venture capital industry’s latest MoneyTree Report, a quarterly report card, showed that overall venture investments continue to plunge. Such is the new “New Economy.”
Nationally, VCs invested $3 billion into U.S. companies, down 61 percent from the $7.7 billion invested in the first quarter of 2008. It was smallest quarterly sum since 1997, and the sharpest decline on record.
In the Bay Area, the world’s leading hub of innovation, $1.2 billion was invested in 172 deals during the quarter. That was a 43 percent decrease in dollars and 26 percent decrease in “deal flow” from the previous quarter.
Investments into every technology sector were down, with clean tech leading with an 84 decline from the previous quarter. It was the lowest quarter in the emerging sector since 2005.
For Silicon Valley boosters, there was a small silver lining. The data seemed to counter the frequent suggestions that the region is in danger of losing its long-standing leadership role in tech. The region attracted 39 percent of total national venture investments during the quarter, compared with 32 percent in the first quarter of 1997. Five of the top 10 deals were in the region.
So what now? The MoneyTree Report — a collaborative effort of the National Venture Capital Association, PricewaterhouseCoopers and Thomson Reuters — can be considered both a lagging and leading indicator for the Silicon Valley economy.
It lags in the sense that, unlike the locally grown dot-com bust, the financial calamity rooted on Wall Street had a gradual, delayed and yet profound effect on the valley. It leads because it illustrates how both startups and venture firms that fund them are under greater pressure to control costs and investments and figure out ways to make money.
Interviews and anecdotal data suggest the investment activity in the current quarter could be weaker still, or just slightly stronger.
“It’s frozen now because there’s a lot of fear,” said Faysal Sohail, managing director of CMEA Ventures. “People don’t have a good handle on when the capital will start flowing again.”
Limited partners (LPs), including pension funds and university endowments, that provide VCs with capital are reassessing their portfolios and investment strategies amid the new economic reality. Most VCs — including the ones expected to survive a continuing shakeout — are having a harder time raising new funds as LPs de-emphasize venture investments.
Rather than making new investments, VCs are increasingly preoccupied with managing portfolio companies, trying to execute mergers and acquisitions that will enable them to get a return on their investments — or just cut their losses.
Startup gurus such as the Founders Fund’s angel investor Dave McClure and TheFunded.com‘s Adeo Ressi say the valley’s level of entrepreneurial energy has not diminished in the downturn. Some laid-off techies are pursuing their own bootstrapped projects or are signing on with startups for little pay in the belief their options will pay off. That is just one of many strategies startups are using to hold down costs.
Good ideas from good entrepreneurs, many point out, are still getting funded. McClure, who specializes in small angel-style investments, says he has invested in seven startups in recent months, only two of which have been announced.
But with venture industry undergoing its own shakeout, VCs are under greater pressure to target the best opportunities for scarcer dollars, rather than place more bets in expectation that at least one will pay off big.
Scott Duke Harris can be reached at sdharris@mercurynews.com or 408-920-2704.
