Is Venture Capital Becoming Risk Averse?

from the doesn't-that-defeat-the-purpose dept

Over the past few years, I've had trouble understanding why VCs weren't investing. Valuations were cheap, and the margin for error was much greater. There was no great rush to go public, so you could take your time nurturing the company to be absolutely ready when the window opened up again. However, here are two stories that suggest why VCs have been slow to invest. The first says some VCs say the overall game is changing. They say that typical "portfolio model" of investing won't work any more, and they need to become more risk averse. They believe there won't be many more "home runs", and so they need to aim for the "singles" instead. That means investing in later stage companies and taking a more active role. Of course, that sort of defeats the whole point of venture capital - which is supposed to be "risk" capital. What that VC is really saying is that he's too scared to make a bet any more. If you're in a risky game and you're too scared to make a bet, it's time to leave the table. The other, more enlightening, argument for why VCs haven't been investing is sort of a trickle-down theory from the VCs at VentureBlog. The theory goes something like this: at each stage, each investor is investing with an eye towards the next stage of raising money. Without an IPO market late stage investors won't invest (too risky). Without late stage investors, early stage investors won't invest, because they figure the companies will run out of their money before they can get the next round from the late stage guys. Without early stage investors, angel investors won't invest for the same reason. I understand this mentality, but think it's short-sighted. These investors shouldn't be looking at the next stage investment. They should be looking at the big picture, and working with companies to develop overall capital strategies that will take them to a successful conclusion (successful, sustainable, profitable business that has cash rolling in non-stop), rather than pushing for just that next milestone. Yes, it's good to see each step in the path clearly, but when everyone is focused on just that next step, the whole process collapses due to a single break in the chain. Right now there are plenty of great ideas with great people that need money, and plenty of VCs sitting on hoards of money. It would seem like there's a simple solution to this, if only everyone would take a longer term view on the situation.