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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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik