Friday, February 22, 2008

Lots of Venture Capital

There's a lot of venture capital out there. According to Wharton's "Get It Started", VCs are sitting on about $80 billion, just waiting for the right investments to come along. In an article called "The Real Deal on Venture Capital" (http://wep.wharton.upenn.edu/gis/article.aspx?gisID=57), Prof. Raffi Amit Helms of Wharton West and a panel of experts said that venture firms are flush with money but are still cautious due to memories of the tech bubble bursting in 2001. Last year investors put about $30 billion into companies, the largest amount since the meltdown. About half of those funds when to information technology companies and a third to healthcare.

Psychology is very important for investors, said the panel. In other words, investors are looking for liquidity events. Last year, there were more IPOs (initial public offerings) and a lot of M&A activity, which have made VCs more likely to make new investments. At the same time, it's difficult to take a company public. A company needs about $100 million in revenue to have an IPO, and it can take about seven years for a business to get to that point. Legal and compliance costs are rising. Compliance with Sarbanes Oxley can cost $1 to 3 million annually. This legislation has had a real dampening effect on business formation because even private companies need to be concerned about compliance.

On the down side, the article also points out that average returns to VCs are about equal to that of the S&P, which is also helping to keep money on the sidelines. In addition, start-ups don't want to part with control just to raise money. They are asking for just enough to become cash flow positive, rather than the millions they asked for prior to 2001.

What are your thoughts about Venture Capital?
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