Capital Chaos

Coming on the heels of a recent report we did on how more investments outside of the Valley, Dow Jones VentureSource released a report about how Web 2.0 startups may have hit their peak - primarily in the Valley. 

While the number of investments in these types of ventures increased 25% in 2007 - up from 143 to 178 (primarily in social networks, social applications and blogging), these pale in comparison to the growth rates from 2002-2006, which was after a big bubble burst and the investments doubled almost every year. 

Some of the reason for the decrease in investments has to do with the lack of product (good ideas) to invest in.  While Facebook accounts for the vast majority of investment dollars that were put into Bay Area deals (22% of all Web 2.0 funding), there is not much else out there.  Yes, these VC’s are putting out dribs and drabs but again, there is seemingly very little if any return on these investments and hopefully this sign is actually a positive one which will force more companies to develop sustainable businesses as opposed to just novel ideas.

The whole “Facebook effect” that we have mentioned on a few occasions is still completely unproven as a sustainable business.  Building applications off of an anomaly and asking for inflated valuations is not something these investors can continue to maintain doing. 

With the downfall of Bear Stearns and other banks who are starting to become tinder boxes built on a deck of cards, VC’s have got to become more disciplined in their investment strategies and start insisting that these investments can actually support a sustainable business model before they invest.  There are some VERY smart guys in the Valley who have done incredibly well but there are a lot of people who made money by cashing out of a company there were once with, created a fund with their proceeds and bam, now they are an investment portfolio manager.  It’s just not a practical extension.  With the exception of a few (FoundersFund to name one) investors and companies alike need to start taking a better look at their investments and recognize that there is increasing diversity amongst where businesses are being developed and funded.