I have written recently about the change in venture capital focus due to Sarbanes-Oxley. The IPO market has dried up due to the costs associated with the new requirements imposed by this legislation, so VCs are now looking at early stage businesses including start-ups. Their exit strategy has shifted to selling out their holdings to larger public companies.
A new report by the National Venture Capital Association finds that VCs are getting a little impatient with this new approach.
From Red Herring:
Both venture capitalists and private-equity investors have seen lower short-term returns on their investments across all stages as valuations stagnated over the last year....One-year returns to venture investment slumped to 3.6 percent during the first quarter, down from 15 percent during the same period in 2004....The decrease in one-year returns points to a poor market for startups, which have been unable to create significant value for their investors during the last 12 months. "We're basically looking at a market that’s moved sideways in the last year," said John Taylor, the vice president of research at the NVCA.
But as reported in Inc.com, VC activity really hasn't slowed down that much.
Despite fluctuations in the performance of short term venture capital, venture investing totals continued to grow in the second quarter of this year, reaching a total of $5.8 billion invested in 750 companies. These figures show a rise of 19 percent over the first quarter's numbers of $4.9 billion. Venture investing for the first half of $10.6 billion is on par to match the investment totals for the full year of 2004 of $21 billion.
So what does this all mean? Really nothing over the near term. VCs still have excess cash looking for deals, which is why they are investing in earlier stages business growth. Fundraising for deals that will be made over the next two to three years is already in place.
Eventually, this may lead to slower investments into new venture funds. But not to worry. Money is a commodity that will seek the markets that give the best balance of risk and return. Money will still be available for start-ups and growing companies as a new equilibrium will be found in the capital markets. And by then, Washington may have come to its senses and fixed Sarbanes-Oxley.
