In recent months, it might seem as if investors have fallen in love with risky corporate bets. For as central banks have pumped eye-popping sums into the system, spreads on high yield bonds and leveraged loans have collapsed, as investors have gobbled up that risk.
But amid this buying frenzy, there is one corner of the corporate capital markets which is notably not feeling loved: venture capital. America’s National Venture Capital Association this month held its annual conference, where it unveiled its latest funding data, compiled with MoneyTree and PwC.
This data were dismal. In the first three months of this year a mere 35 US venture capital funds raised just $4 billion – 12 per cent lower than a year before.
And that in itself followed a lousy year: in 2012, venture capital raised a mere $28 billion of funds, a quarter of the amount of money that was raised in 2000, and half the levels seen in the late 1990s.
More surprising still, that 2012 tally was lower than in 2011, let alone 2007. And in Europe (which has never had a big venture capital sector to start with) the pattern is even more grim.
Does this matter for the economy as a whole? Some optimists might argue not.
After all, back in 2000, when more than $100 billion of venture capital money was raised in a single year, much of that largesse was wasted on daft ventures. When the dot.com bubble subsequently burst, that duly devastated returns; so much so that returns on the venture capital sector as a whole have been little better than returns on public equity indices in the past decade.
Given that, it is perhaps not surprising that investors are feeling leery; and doubly so, given that the weakness of the initial public offering market makes it tough for venture capital funds to find any exit strategies.
In any case – or so the ultra-optimists argue – the decline of the venture capital sector has not prevented money from flowing to some entrepreneurs.
These days, crowdfunding platforms, which raise loans from small investors on the internet, are one new source of funds. Some large industrial groups have recently stepped into the financing gap by providing seed capital for fledgling ventures too.
And in America and Europe, many small entrepreneurs are now financing today via friends and family, or credit cards. That is not an entirely radical break from the past: as the Kauffman Foundation points out, most small start-ups in America never use venture capital funds, particularly outside Silicon Valley.
But, while those caveats are reassuring, the decline in venture capital has nevertheless taken even seasoned observers aback.
If nothing else, it raises important questions about who will fund big speculative innovation bets in the future. After all, in recent decades, as Bill Janeway, a co-founder of Warburg Pincus, points out in the book Doing Capitalism in the Innovation Economy , technological innovation in America has been driven by a combination of state investment (say, via the military) and private sector gambles on research and development (via venture capital). But government largesse is now drying up, even as private money appears to be wilting too.
That does not necessarily matter for some entrepreneurial ventures; a corner shop or software developer can be funded with friends and family. But bioscience, say, cannot. And as my colleague April Dembosky recently reported, venture capital funding for the life sciences has been shrinking too.
Of course, if you believe in the self-correcting power of capital markets, this pattern should eventually change. Eventually investors will tire of buying government bonds or high yield funds, and hunt for new horizons.
And when those post-dotcom losses start to fade from performance data, investors may look at venture capital again, particularly if rising equity markets make it easier to conduct those all-important IPOs.
But don’t bet on that happening yet; not even the NVCA is predicting any dramatic rebound in the venture capital world soon.
For the moment, in other words, the sector stands as a sad reminder of just how bifurcated the financial system remains. Or, if you prefer, just how inefficient central banks pump-priming has been when it comes to delivering capital to the parts of the economy which need it badly – and which are essential to long-term growth.
Copyright the Financial Times 2013.