Earlier this week, we reported on the fact that the first quarter of the year saw venture capitalist investments drop from the end of last year, but start at a higher rate than the beginning of 2009. In the article we mentioned the boom and bust cycle that is found in economics, which in America has been marked by the dot-com bust at the turn of the century, and the financial crisis of recent times. These two downturns are part of a cycle of ups and downs seen throughout history, but could they be getting shorter and more frequent?
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Peter Bodine, managing director of Allegis Capital, recently guest blogged on Entrepreneur Corner over at VentureBeat and provides an interesting angle on the current state of venture valuations and how it could signal a quickening boom and bust cycle. As he sees it, the high prices recently placed on a few startups echoe those seen before the dot-com bust.
"Blippy, only four months old, is reported to be worth about $38 million. Quora, a massive user-created question-and-answer site that is still beta-testing, was estimated at roughly $86 million in its most recent round. And the buzz is that Foursquare will be worth at least $80 million after it completes the round it's currently negotiating," writes Bodine. "There is a lesson in all this for startups. If you are demonstrating noticeable success, seek additional funding now, not later."
Bodine anticipates a drop in VC funding this summer, a time he says is a common slow period for VCs, and warns that startups late to the game could "miss the action" and end up competing with more companies later in the year. The summer is a popular time for incubators, and many companies exit these programs and seek funding in the fall and winter, so Bodine suggests going after capital now if your startup has any measurable progress.
VC, M&A and IPO numbers have been suffering in the last few years with the economic crisis and have been difficult to forecast. M&A numbers broke records in the first quarter of 2010, but IPOs continued their near non-existent levels. VCs raised their lowest amount of funding in an opening quarter since 1993, but invested a healthy amount.
One could call this atmosphere unstable, but I'm not so sure that it will collapse again in the middle of the year. Following the dot-com bust, the VC market steadily climbed back to the levels we saw in 2007 and 2008 before the housing failure, and I wouldn't be surprised to see similar gradual growth throughout 2010. It is unlikely that the yearly figures at the end of 2010 will be impressive in comparison to earlier years, but this year should be an improvement over the lows seen more recently.
There are certainly risks involved with founding a startup and seeking funding in this economy, but hey, what would startups be without taking a few calculated risks in hopes of being rewarded?
Photo by Flickr user garymalkn.
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