The Lack of Funds In The Venture Capital Markets

Venture capital is going through one of its roughest periods ever. To understand the lack of funds in the market, it helps to look back in time to see when things were more robust.

The VC market is only as strong as the economy. This is because it is a liquidity based form of investment. When credit and liquidity is restricted in the general economy, funding sources for VCs dries up. If there were any doubts about this, the Great Recession put them to rest. 

There is a crisis in the venture capital markets at the moment. The crisis revolves around funding. Venture capitalists are having a very hard time raising funds that they can flip towards startups. A look at the historical funding rates paints a clear picture of this:

2000 – $85.6 billion raised

2001 – $42.5

2002 – $19.0

2003 – $10.4

2004 – $18.9

2005 – $28.7

2006 – $31.1

2007 – $40.1

2008 – $28.5

2009 – $13.5

2010 – $11.6

As we can clearly see, the markets are suffering now from a lack of investment. The $11.6 figure represents nearly a 75 percent drop from 2007. That is a staggering figure when you really think about it. It is also a figure that makes it unlikely we will see a robust return of investment in 2011.

Is there any light at the end of the tunnel? Of course. The above figures show a clear trend of peaks and valleys with funding. While the last few years may have been very bad, there is little doubt that there are now huge opportunities available for venture capitalists. This creates a major need and sooner or later investors will flood in to fill that need. The only question is when.