In tough venture capital market, quality over quantity matters

Money under a mattress.

Steve Chiotakis: We've seen some pretty big initial public offerings come out in the last couple of years -- mostly online companies. But that hasn't stopped a big slide in U.S. venture capital funding, which for the third quarter dropped to the lowest level in eight years.

Mark Heesen is president of the National Venture Capital Association. He's with us now from Boston. Morning, Mark..

Mark Heesen: Good morning.

Chiotakis: What does it say to you that the venture capitalists have had the worst quarter since 2003?

Heesen: It's a tough environment. I think that what's happening is that many of our companies that want to go public can't go public in the environment that's out there right now. And that means that our investors -- colleges and endowments and pension funds -- can't get a return from us, so they're very leery about jumping into the venture capital game right now.

Chiotakis: You keep hearing about the Facebooks, though, and the Linked In, and all those others. Do those not count?

Heesen: Well, you'd like to see some of these companies actually make it out. Linked In did, but others -- such as Zynga and Facebook -- are still on the sidelines. But really, the issue is not those high-flying kind of companies, it's the next group of companies that have been sitting in the pipeline now for, some of them, up to a year, wanting to go public and just not able to do so because of the environment that we're in right now.

Chiotakis: All right, so the environment's really bad -- when does it get better?

Heesen: That's a good question. I think that what we need to see is stabilization in Europe; I think we also need to see Congress get its act together that brings stability to the marketplace.

Chiotakis: You know, we hear about this lag between when investors raise the money and when the investment comes. What does this mean for start-ups and new companies heading out into the next few years?

Heesen: Well, what it means is that there will be fewer entrepreneurs being funded. That's not necessarily a bad thing, because the quality of entrepreneurs continues to get better.

Instead of having as many failures as we've had in the past, with the good quality of entrepreneurs that you have -- and a much thinner funnel -- the companies that we pick to get venture will actually be better companies, better run companies, better technologies and actually will be able to sustain profitability over the long term.

Chiotakis: So quality over quantity?

Heesen: Absolutely.

Chiotakis: Mark Heeson, president of the National Venture Capital Association. Mark, thanks.

Heesen: Thank you.

About the author

Steve Chiotakis was the host of Marketplace Morning Report until January 2012.

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