The pace of US venture capital investments remained steady at US$7.4 billion during the second quarter despite a wobbly stock market that has made it increasingly difficult for the financiers of new ideas to cash out of startups.
The amount of money spread across 990 deals in the April to last month period was unchanged from the same time last year, figures released on Saturday by the National Venture Capital Association, PricewaterhouseCoopers and Thomson Reuters showed.
But all is not well in the venture capital industry, largely because the stock market has turned a cold shoulder to initial public offerings of unproven startups.
Just five startups funded by venture capitalists have completed initial public offerings (IPO) this year, and none made their stock market debut in the second quarter. This was the first time in 30 years that an entire quarter has passed without at least one IPO by a venture-backed startup.
Also, fewer buyers appear interested in acquiring startups.
Through the first half of the year, the number of acquisitions involving startups backed by venture capitalists had dropped by 28 percent from last year, the National Venture Capital Association, a trade group said.
This is forcing venture capitalists to pour money into older startups for longer periods than they anticipated while also depriving them of a chance to realize a gain from their earlier investments.
Meanwhile, entrepreneurs trying to raise money for their first time are having a tougher time.
The number of first-time financings completed by venture capitalists usually rises from the first quarter to second quarter because of seasonal trends. But this year, the number of first-time financings fell for the first time since 2001 when venture capitalists were still sifting through the ruins of the dot-com bust.
The current conditions aren’t as bad as 2001’s devastation, but more venture capitalists are starting to worry, said Trevor Loy, managing partner with Flywheel Ventures.
“It’s a measured concern at this point,” he said on Friday. “We view it as a cyclical phenomenon. Clearly, the longer it plays out, the more we would have strong concerns.”
Loy and other venture capitalists think this is a prime time to be on the look out for promising startups that are being shunned because of the uncertain economy.
Since it typically takes at least five years for a startup to mature into an IPO candidate, its makes sense for a venture capitalist to try to negotiate an investment on favorable terms with cash-starved entrepreneurs now, said Michael Eisenberg, a general partner with Benchmark Capital.
“Investing when there is some despondency in the market means you can set yourself up for some good returns down the road,” Eisenberg said.
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