Venture Capital – Moving up the Ladder

Posted on March 10, 2008

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In an article earlier this month, I examined an interesting trend in venture capital based on data provided by PWCMoneyTree. In short, the data appears to indicate that venture capital is moving away from investments in the “Start-up/Seed stage” and more towards later stage companies – those companies in “Expansion” or “Later Stage.”

A recent article by Joseph Bartlett on VC Experts seems to find similar observations, using Jensen’s “Eclipse of the Public Corporation” for support to his argument. Bartlett refers to Rebecca Buckman’s October 2007 article in The Wall Street Journal – “Venture Capital Goes Big” that discusses venture capital’s increasing activity in the buyout arena of private equity.

While the private equity industry seemed to nicely partition itself in recent years – venture funds here, LBO/MBO firms there – a funny thing happened – the walls between participants in the private equity industry seem to have disintegrated to some degree. I referred to this in an article last summer based on Mark Boslet’s article in the San Jose Mercury News.

The net result? Greater demand for LBO/MBO deals, causing valuations to rise and profit margins on these deals to fall, and in turn possibly contributing to private equity’s troubles as the 2007 credit crunch hit the financial markets. Bartlett also discussess the increasing price of LBO activity due to this increased demand, more plainly referring to the “winner’s curse” that haunts firms that overpay for acquisitions.

If this trends continues, the entrepreneur in her garage with next big thing will find that traditional venture funding may be more difficult to attain than ever, and start-up capital will likely to be better accessed through the increasing angel capital networks emerging throughout the country.


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