Money on the Sidelines

written by David A. Broadwin

There is a lot of money sitting on the sidelines right now. 

According to the National Venture Capital Association, 235 venture funds raised nearly $35 billion in 2007.  This is after a string of steady growth years beginning in 2002.  Furthermore according to the NVCA, 130 venture funds have raised more than $16 billion so far in 2008.  This seems to me to be a very high number.  It provides support for the anecdotal evidence that a lot of funds, including early stage funds, have been raised in the last few years.

The National Venture Capital Association also reports that venture capitalists invested $7.4 billion in 990 deals in the second quarter of 2008.  This number does not seem consistent with the general economic climate, but there may be an explanation for it that is consistent with the downturn in the general economy.  As with the amount of funds raised, I suspect that the NVCA measure includes many transactions that are not  "traditional" early stage venture investments.

I will do a little more research over the next few days and try to get a more granular focus on the activity level in the early stage fund space.

The NVCA clearly agrees with what we are experiencing that there is a crisis in the world of exits.  According to the NVCA, there have been 5 IPOs so far in 2008 compared to 86 for all of 2007, and there were 120 total M&A transactions in the first six months of 2008 compared to 169 in the first six months of 2007.

My belief is that there is a lot of money that has been raised that needs to be put to work and will not be until either or both of (a) the general economic/financial crises is behind us and/or (b) the crisis in exits passes.  When these things happen, and it could be a while, the flood gates should open because many of the funds will be several years into their 10 year life and will need to put the money work quickly.