Venture capital investing is supposed to be a long-term investment play...venture funds generally have 7-10 year durations, over which time they invest the money raised from limited partners (e.g., teachers' pension funds, endowments, etc.).
In addition, most VCs will tell you their own time horizons for making investments in startups is pretty long... usually 5-7 years, as this has historically been the minimum amount of time it would take an early stage firm to reach IPO.
So why does it seem that the venture industry is almost totally synchronized and correlated with the U.S. economy and stock market? Shouldn't venture capital, with its lengthy and comfortable 5-10 year time horizons for investing, theoretically be almost counter-cyclical?
Wouldn't it make sense that venture investing might actually pick up in down times, since relative valuations would fall (and thus an investor could buy "more for his/her money")?
Theoretically, it should-- and in a purely rational market it would-- but that would ignore human psychology. In short, the "fear factor" goes all the way up and down the food chain. The public pension funds that put in the source money are looking at the state of the exit market (i.e., IPOs) as of today-- not what they are likely to be 5 years from now (and for the record, the IPO market is abysmal).
As a result, pension funds are not putting as much into the VC firms-- in Q1, according to the database of Private Equity Analyst, 23 venture capital funds raised $2.4 billion in the first quarter, a 64% drop from the $6.7 billion raised by 57 funds a year ago.
This causes the VC firms to clam up as well-- i.e., if you're not going to be able to raise another fund, you might as well drag out the current one as long as possible, right?
We'll see how the difficulties VC firms are having in raising money are filtering down to entrepreneurs in the next posting....stay tuned.
My Talk At MIT
5 hours ago