VC's need to leave the Internet

Matt Bowman · October 30, 2009 · Short URL:

It's time to definitively move on to sectors in greater need of large capital infusions.

 The good news is we've built the arc. The Internet will keep the startup world afloat as venture capital enters an even longer and more drawn out recession than the rest of the economy. Even as shrinking commitments from endowments and worsening 10-year returns ensure a long-term capital pullback from the global Silicon Valley, the number of funding deals has not been severely impacted, and probably won't be.

Take angel funding. Q3 saw a 27 percent decrease in angel commitments from the same period year before, down to $9.1 billion. but the number of deals remained the same. Roughly the same number of companies received angel infusions as during the good times, but each company got a smaller amount. And there's a good chance the startups didn't need more than they got.

One of the curious things about Silicon Valley is that demand for cash is only very loosely correlated to supply. Companies can be urged to take more capital than they need because a fund manager at Yale's endowment tweaks his allocation algorithm. Joe Entrepreneur can be tempted to ditch his 9 to 5 and run with his half-baked idea because a VC is waving greenbacks in his face. So it goes in the good times.

Innovation is cheaper these days. On the Web, the path from idea to creation and from marketer to consumer is short and sweat. Add the blossoming micropayments trend, and you have a thousand points of light: Small web-based services that need a shorter runway, and can get by on angel-sized funding.

That's great, but it's not venture capital. It's traditional SMB. The VC industry is like a Caterpillar Excavation Shovel that finds itself in a room full of potted plants. Which is partly why it's shifted from software to green technology, where hardware and deep-dive research from top institutions is still required. IT technology is barely outpacing healthcare in VC investment, according to Dow Jones VentureSource--a surprising stat for those who've been breathing the IT-centric Valley air for the last few decades.

The Web that venture capital built will continue to evolve, but in one sense, it's done. The arc is finished and floating along. Small companies have what they need to thrive in it, without huge investments. It's time for the construction crew to move on (though it can be very hard for VCs to leave their baby). Healthcare, greentech, education, cyber security... these are the sectors crying out for venture capital.

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