the state of venture capital

Filed in archive Venture Capital on April 5, 2004

The Economist has a nice round-up of the state of venture capital. I really respect their research capabilities although the contents are a bit mixed up.

"Venture capitalists have typically concentrated their investing in two broad areas: technology and health care. During the enthusiasm of the bubble years, the term "technology" was stretched to include any dotcom, even if it aimed to sell pet-food or to deliver groceries in a white van. Today VC firms have mostly returned to genuine technology ventures, and notably to companies developing software applications for corporate customers. That has coincided with a rebound in company spending on IT projects."

"One computing area that has continued to attract VC investments is open-source software---that is, computer code that is not owned by, say, Microsoft or Apple, and hence can be modified by anyone. For instance, Accel Partners, a big Silicon Valley VC firm, is betting on Jboss, which creates computer applications for corporate clients using Linux, the main open-source software."

While there have been a couple of investments in the open-source area it has been a small fraction of the total investment volume. Also many companies in this area lack the real scalability that makes nascent technology so interesting.

"While technology investing is becoming fashionable again, VCs never lost their fondness for health-care start-ups. The lure of biotechnology and drug development has always proved irresistible, even though returns, so far, have been disappointing."

And finally a slap for Germany and France's VC industry:

"Europe's governments have been slow to simplify rules that govern the creation of new companies. Restrictive labor laws in Germany, France and many other European countries are a big obstacle to many start-ups, which often need the freedom to hire and fire staff at short notice and cheaply just to survive. High taxes on capital gains also make it less rewarding for entrepreneurs to incorporate in such countries, which in turn puts off VC investors.