Saturday, October 18, 2008

Squeezed: Venture capitalists curtail investments

I have mentioned that venture capitalists are one of the substitutes for banks. So it is a problem that their 3Q startup investment activity is down 9%?

Yes, I would like to see venture capitalists expand their role. But not necessarily in funding startups, but rather to expand their role in funding investments that would have traditionally funded by banks. The story cited above does not discuss whether venture capitalists are doing, or considering, such a new role.

I have already discussed how savers are less willing to hold the same dividend streams. In other words, maybe savers want to invest less in risky activities. If so, startup funding (of which venture capital startup funding is part) would be down regardless of what happened to banks. The question is whether the decline of banks has caused venture capital to decline less than it would have.

I have noticed that the NASDAQ is down about the same as the S&P 500. However, the proper comparison would be the market value of S&P 500 capital as compared to the market value of NASDAQ capital -- that is, including the market value of the bonds of these companies. It is my impression that NASDAQ capital is less leveraged, so an equal percentage decline in NASDAQ and S&P means that the market value of NASDAQ capital fell by a greater percentage.

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