Venture Capitalists Abandon Their Market

The National Venture Capital Association says that VC investments fell slightly more than 50% in the second quarter.

The group reports that just 25 venture capital funds raised $1.7 billion in the second quarter of 2009. “This level represents the smallest number of venture funds raising money in a single quarter since the third quarter of 1996 (21 funds) and the lowest level of dollars committed since the first quarter of 2003 when $938.1 million was raised”.the NVCA reported.

The news almost certainly means that early-stage firms that are looking for outside money to continue their operations and grow will find getting VC funding extremely difficult. VC firms will also have to triage their current portfolios and deny capital to their least promising investments. Both of these factors mean that a number of companies which rely on support from the venture capital market will close. Credit is so tight that borrowing money from financial firms such as banks will be nearly impossible, particularly for companies which are posting losses.

Innovation is likely to be an ongoing victim of the recession. A great deal of the money invested by VC firms goes into technology, biotech, and alternative energy firms. All of these sectors are critical to future national employment levels and the American balance of trade. The setbacks to these industries is incalculable, but it is certainly significant. Public stimulus money may make up part of the difference, but that will not save many firms that would normally have access to private capital.

The second quarter figures make it almost certain that venture capital investments will not rebound in 2009. There may be an improvement next year, but for scores of companies that will be too late.

Douglas A. McIntyre