One of the best barometers of the economy is the behavior of venture capitalists and angel investors.
The stage of investment is one key to follow. When they shift to later stage deals as they have the past few years, it generally means they are taking a more conservative approach to investing, as later stage deals tend to have less risk. During robust times, or during speculative frenzies, they tend to move to earlier stage deals.
A report by the National Venture Capital Association casts a rather dark shadow over the economy to come. From the NVCA report:
"While the exit market remains challenged, the venture industry is operating under the same long-term philosophy it has adhered to historically. Venture firms are prepared to invest for 5 to 10 years and will stick with their companies through difficult times. That said, for the remainder of the year we will be watching first-time funding levels, which declined this quarter. This dynamic could very well be the result of the closed IPO window and will become concerning if the situation is prolonged."
Rather than going to new deals, more VC money is going into already funded deals to keep them afloat until an exit strategy can be executed.
While the IPO option has dried up, that is really not news. That change goes back to Sarbanes-Oxley. What the report does not say, but I believe is now a compounding factor, is that the main exit strategy of selling to a large publicly held corporation is declining.
Keep your eye on this. If corporate America continues to get conservative due to inflation, or worse yet stagflation, it will get even tougher to find early stage funding for high growth deals.
