Venture capital plays a vital role in the launching of businesses in the United States. It fills a funding niche for many businesses that would have no other access to the capital required to grow. Given this fact, it should be considered troubling that the venture capital industry is in crisis.
Venture capital plays a huge role in the launching of vital businesses. It is by far the biggest individual funding source for technology companies, for example. Consider the story of Google. The search engine is only a little more than 10 years old. How did it grow to become the dominant force on the web in such a quick time. Yes, it is the best search engine in the mind of most people, but that isn’t enough. It needed capital to hire employees, build out server centers and undertake all the daily, costly tasks involved in building a small company into a large one. Without venture capital, it never would have pulled it off.
The venture capital industry in the United States is in crisis because it is contracting. This is not just a measure of the economic problems we’ve been experiencing. The crisis started in 2006 with 2007 showing the first real scary statistics. 2008 was even worse. Nobody knows about 2009 because it is too early to tell, but nobody is very optimistic.
So, what is the crisis? Well, the venture capital industry has contracted a lot. The numbers have fallen from 1,019 venture capital firms to 868 as of 2008. That number has undoubtedly dropped even more in 2009. The problem is the number of funds put together by these firms to invest in companies is dropping dramatically as well. Of the 868 firms that existed in 2008, 828 had only launched one fund for investments in the previous eight years. One fund provides capital to between 10 and 20 companies.
What does this all mean? The answer is unclear. As other parts of the world such as China and India grow economically, the investment money may be flowing to them. What is clear is there is less of it in the United States. In these troubled economic times, that simply is not good news.
Thomas Ajava writes for
VentureCapitalInvestmentFirms.com - where you can learn more about
venture capital funding.
