Sunday, April 03, 2005

NEWS: Too much money going into VC

Mar 31st 2005 From The Economist print edition

...America's venture capitalists put $20.4 billion into deals in 2004. Although this sum was far below the amounts of the bubble years, it marks the first increase after three years of declining investment, according to VentureOne, a research firm. The biggest rise by far was in software, where investment grew from $4.1 billion in 2003 to $4.9 billion last year. Median valuations for American start-ups in 2004 were $13m—the highest since 2001, and a 30% increase compared with 2003.

...Following the dotcom crash, venture-capital funds did not invest much because good deals were scarce. Last year's uptick in investment came from finally finding suitable uses for funds raised in 2000 and 2001, says Matt Garlick of VentureOne. Still, an “overhang” of uninvested money—a breathtaking $54 billion in 2004—is now looking for deals. And more is to come: last year American venture-capital funds doubled the amount of fresh capital they raised from investors, taking in $17.5 billion, against $8.8 billion in 2003.

...But the allure of returns remains. “Limited partners are so desperate to deploy assets in this class that they are willing to fund new firms or old, bad firms—that is unprecedented in history,” says William Sahlman of Harvard Business School.

...Meanwhile, many veteran venture capitalists are fretting, especially now that pension funds and endowments are racing to place money in venture capital (partly because they cannot get decent returns elsewhere). “I am concerned that the inflow of so many dollars will result in overvaluations and inflated prices that we can't recapture on exit,” says Peter Barris of New Enterprise Associates, a large venture fund. Apparently, you can have too much of a good thing.


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