Cliffhanger

It's interesting how two different analysts can interpret the same data and come to very different conclusions.  For example, TechCrunch, with a flair for the dramatic, concludes that venture capital is "falling off a cliff".  Author Sarah Lacy rejects the conventional wisdom that: 

“Recessions are the best times to start companies! We always invest in downturns! There are fewer competitors, and you get a better caliber of entrepreneur! Dollars can stretch further because salaries and rents are lower! We’re not looking to take a company public for years, so why would we run our companies based on the public markets and macro economy?”

Her thesis is that because VC performance is evaluated on ten-year cycles, they never really corrected after the public market bust in 2001-2002.  With declining returns, VCs are reluctant to write checks without a resilient growth category defying the current conditions.  Certainly she is not alone in this opinion.

On the other hand, however, the respected ReadWriteWeb's COO Bernard Lunn takes the diametrically opposite view and declares in his headline "VC Investment in Internet Deals Did NOT Fall Off A Cliff".

How can that be?  Writes Lunn: 

What interests us at ReadWriteWeb is the small subset that is (a) seed- and early-stage, and (b) Internet-specific. So we drilled into those numbers. Q1 2009 saw 34 deals, with a total of $138 million invested. Is that good or bad? Well, 34 companies getting their first investment round is one helluva celebration for 34 entrepreneurs, their teams, and their investors.

How about 15 deals worth $76 million in Q2 2003? That was actually the lowest in the 53 quarters tracked by MoneyTree.

If you want to be positive, then, our position now is twice as good as it was in Q2 2003. So here is an alternative headline:

"VC investment in Internet startups is up 100% from last downturn".

So this is sophistry, but there is a point to it. This most recent boom cycle, at its peak in 4Q07, recorded $454 million investment in early-stage internet deals, as contrast to $4.5 Billion in 1Q00. Less than 10% is in play this time around, so, as Lunn puts it, "we don't have as far to fall".

No one is denying that the trend is down, but we're inclined to the RWW view that while total number of deals and amount invested have both declined from the peak, there's far more reason to be optimistic than otherwise.