WSJ reports: As Funding Dries Up, Fledgling Silicon Valley Firms Are Shutting Down; Fears of Chill on Innovation
“Many start-ups survived last year by slashing costs and deferring development projects. But as demand for their products continues to deteriorate and funding dries up, these young firms are now running out of lifelines. Many are calling it quits, recalling the dot-com bust earlier this decade.
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Venture capitalists pulled back sharply in the fourth quarter as credit markets seized and stock markets collapsed. Venture capitalists invested $5.54 billion in U.S. start-ups in the fourth quarter, 27% less than the third quarter, according to data compiled by VentureSource.”
Another excellent take on the same theme is Stacey Higginbotham´s analysis at GigaOm:
“The crisis in the financial market is coming home to roost for startups of all kinds. Today’s Wall Street Journal has an article detailing the death or firesale of several startups in the last few weeks. It’s grim, but this is only the beginning for many venture-backed companies, as we reported back in October. Over the next few months, we’ll see continuing news of businesses giving up the ghost as their venture backers take a hard look at upcoming cash needs and decide to prune.
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Venture capital is a cyclical business that follows the fate of the stock market, so it depends on where a startup is as the cycle turns from boom to bust. Unfortunately, many of these unlucky startups are getting crushed under the wheel as it rolls through the downturn. Right now is a good time to work on an idea, but a bad time to be selling things.
However, innovation won’t just stop.VCs are still making selective investments in early stage startups at newly reasonable valuations, hoping those deals are ripe by the time the economy reaches the next boom.”
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By way of Stacey Higginbotham article at GigaOM. For the full WSJ article, please click here
The WSJ article mentions that this market is not “survival of the fittest,” partly due to the inability of VCs to continue funding portfolio companies that are generating revenue. So what’s holding up VCs? Their funding sources – university endowments and pension plans – are unable to put cash into later rounds because their “Yale model” illiquid portfolios have cratered. The credit crunch claims yet more victims in Silicon Valley.
So when are VCs going to apply for bailout money?