Peter Kafka

Recent Posts by Peter Kafka

VCs Closed Their Checkbooks Last Month

The myth of professional investors like venture capitalists is that they’re not like us: They’re smarter, they can see around corners, and they’re bold when we are quivering.

Or maybe they’re just like us: When their 401k’s gets crushed in a once-in-a-lifetime market rout, they think twice before writing another check.

That appears to have happened in October, when VCs spent less money, on fewer companies, than they have in years. Details from Thomson Reuters/PE Week, via PE HUB:

The data show that U.S.-based venture firms invested in just 250 companies in October, down from 565 companies in September and 518 companies in October 2007. You have to go all the way back to January 2004 (when they invested in 232 companies) to find a lower number. The only other October with fewer deals was in 1993.

The amount of capital that VCs are investing also plummeted in October, when U.S.-based firms put $2.5 billion to work, down from $3.8 billion in September and $3.2 billion in October 2007. The October 2008 total is the smallest amount that U.S. VCs have invested since February 2006, when they invested about $2.4 billion. Looking only at October, the last time the monthly total was lower was in October 2004, when about $2.4 billion was invested.”

Recall that in addition to the market getting crushed last month, October also ushered in a flurry of look out! pronouncements from some of the VC world’s biggest names, including Sequoia Capital. So it’s understandable that deal flow might dry up.

But it’s not going away entirely. And it doesn’t mean that VCs are avoiding Web 2.0-like gambles. See, for instance, the $20 million or so that investors just pumped into Project Playlist, yet another music discovery services with both legal challenges (the music labels are suing it) and operational ones (there isn’t much revenue, and getting more will be tough).

Nor does it mean that the investors who fund VCs themselves are bailing out–yet. More on that later.

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work