We've Hit Bottom
Back on March 28, Tim Oren of Pacifica Fund posted his prediction that we had hit bottom. Today, PriceWaterhouseCoopers released their quarterly MoneyTree survey with the data to confirm that Tim was most likely right with venture investing hitting a 5-year low in Q1 2003.
Of course, a low does not make a bottom. But as Tim mentioned in his posting and as we are definitely seeing in our investment deal flow at August Capital, new company formation is way up in Silicon Valley. Venture deals take awhile to complete -- given the long due diligence and legal documentation process -- but more deals were getting agreed to in Q1 2003 and more deals will get closed in Q2 2003.
The most interesting quote to disagree with in the MoneyTree report is from Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, who said
The reality is that venture capital will not lead the economy out of this slump. It will follow it out. Restoration of global stability appears to be underway. But, until the public markets and liquidity opportunities show signs of sustainable improvement, venture capital will not rebound.
Venture capital will never lead the economy out of a slump: it's just too small a factor in the U.S. economy to ever matter. But increased venture capital investing is absolutely a leading indicator of better times ahead.
I don't think we'll hit bottom until there are new investments in basic productivity software products that compete with Microsoft. With the core being theoretically owned by a company that's out of the reach of entrepreneurship, the venture capital industy has nothing to do. In other words, the bottom isn't visible until thinking changes radically. Imho.
I'd argue that taking on Microsoft would be one of the last things you'd see this early in the upswing... it's more a time of more conservative, fundamental technology bets outside the sweet spot of any 800 pound gorilla. Only later into the cycle, as the public markets improve and the overall economy has more wind at its back, do investors (and entrepreneurs, for that matter) feel more comfortable going after the big guys.