VC Lies by the Media

vc_dummies.gifI always enjoy watching the mainstream media get “caught up in the hype,” only to make fools of themselves. Lately, they seem to be using venture capital as the latest punching bag.

Today, the Financial Times published a piece (that I found via MSN Money) entitled “VC rises to dotcom bubble levels.” What a misleading load of crap.

As with many stories, sometimes you have to go beyond the headline to get the data, and then come to your own conclusion.

The article serves up these tasty morsels:

The volume of money invested globally in venture capital is set to top $32bn this year, more than has been seen for four years, putting investments closer to levels seen during the dotcom bubble, research by consultancy Ernst & Young has found.

Last year, global investments in venture capital targets (normally defined as companies up to 10 years old ) reached $30.9bn; up from $29bn in 2004, $27bn in 2003 and $28.6bn in 2002.

As in the dotcom bubble of 2001, when venture capital investment reached $51.2bn, much of the focus this year has been on technology companies. Biotechnology and internet and other computer-based technologies are among the hottest sectors, with technology to reduce burning of fossil fuels or to cut emissions also attracting a large proportion of funds. About 56 per cent of venture capital investment in the first three quarters was in IT companies; with 29.5 per cent devoted to healthcare companies.

Okay, so let’s look at the facts.

Looking at this data via a simple Excel chart, we see this (the four darker blue bars are projected by Excel based on a simple linear trend – excluding the 2001 outlier which would have skewed the results):


You’ll notice that if the current trend continues, by 2010 we will not have reached the bubble’s peak of $51B. Recall the title of the article published by the Financial Times: “VC rises to dotcom bubble levels.” Rubbish, I say. Even if their projection of $32B holds true for 2006 (which it will, I’m sure), that is still a delta of $19.2B from 2001 levels. Nearly $20B!! In my opinion, that hardly puts us at “dotcom bubble levels.” Are deals getting done? Yes. Are we near 2001 levels yet? Factually speaking, not even close.

There is a small (but growing) part of me that thinks the mainstream media wants another bubble.

I do like the quote from Gil Forer of Ernst & Young, though:

We came out of the bubble with much stronger technologies and with better entrepreneurs. The quality of technology is much better and that is driving more investment.

I think he is dead on. The levels of investment are rising, steadily – but there is a direct correlation to the quality of those deals, which we didn’t have the last time around.



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