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January 24, 2005

Equilibrium?

Justin Hibbard

It's that time of year when two major vendors of VC data, Thomson Venture Economics and Dow Jones VentureOne, release their annual figures on the total amount of VC money invested in the U.S. Their results diverge frequently, but one point they agreed on this time is that the amount of VC money invested in 2004 increased year-over-year for the first time in three years. In other words, the post-bubble malaise began to wear off last year, and VCs returned to investing actively. Now, the million-dollar question: is the current level of VC investing the "new normal?" (Hey, that sounds like a good title for a book.)

Several VCs we've spoken with in the past year have proposed that their industry is currently at or near equilibrium. In this Goldilocks scenario, VCs are investing just enough capital to create just enough private companies to satisfy the appetites of IPO investors and acquirers three to five years hence. If that's the case, then somewhere around $20 billion of VC money per year is the magic number. The MoneyTree Survey (released by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association) found that VCs invested $20.9 billion in 2,876 deals in 2004. The Quarterly Venture Capital Report (released by Ernst & Young and VentureOne) put the figures at $20.4 billion invested in 2,067 deals. The next numbers to watch will be the total value of VC-backed IPOs and M&A transactions in 2004. If those figures are growing in tandem with VC investing, perhaps the business really has reached some kind of cosmic balance...for now.

01:24 PM

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