Venture Capital Investment up 5.4% from Last Year

In the film “All the President’s Men,” Bob Woodward and Carl Bernstein try to figure out the Watergate mess and get advice from “Deep Throat” (who in real life turned out to be the second-highest FBI man W. Mark Felt), who tells them “follow the money.” That isn’t bad advice for those outside politics. When it comes to where the economy is headed, sometimes it’s useful to see what the big money is doing. A quarterly report by Dow Jones VentureOne and Ernst & Young LLP shows venture capital funding is 5.4% higher than it was last year, and it is focused on alternative energy and the internet.

Reuters reported, “With $19.45 billion invested during the first three quarters, the US venture industry is on track to spend around $25 billion in 2006, marking the biggest year since 2001, when $33 billion was invested . . . . Current levels are a little over one-third of the $63.4 billion spent in 2000 -- the peak year of the dot-com boom. Financings tripled for alternative energy companies, as venture capitalists backed 14 deals worth $110.2 million. Funding for information technology -- especially the latest generation of Internet start-ups known as ‘Web 2.0’ -- grew 41 percent during the third quarter from the year-earlier period.”

Venture capitalists are a bit different from most other money managers. The money is not thrown away, but it certainly is a speculative investment. While they want a return on their funds, no one who invests with them would go to bed hungry if it turns out to be a bust. What the VC (venture capitalists, Viet Cong, not much to pick from there) look for is “the next big thing.” They are less interested in a better mousetrap and more interested in houses that repel mice.

Thus, their interest in alternative energies. Simply put, there is no way oil is sustainable forever. It will grow scarce, the price will rise and eventually, the market will shift to a cheaper source. That is Adam Smith’s invisible hand in action. The investments made in alternative energy represent capital looking for the silver bullet that will take care of the werewolf of petroleum.

Less obvious is the Web 2.0 set of investments. Having been burned by the dot-com bubble popping, one would think that money would stay away from this. However, investors are older and wiser about the new technology and its money-making limitations – or at least, there is experience that should make them so. Every one of these investors is slightly annoyed that he wasn’t in on the YouTube-Google deal. So, they are looking for the next one.

Meanwhile, Ford posted a $5.8 billion loss for the third quarter, and not a single VC dollar went to autos. One can see the handwriting on the wall – and the hand-wringing in the boardroom.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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