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  • Drought in VC funding Threatening Startup Innovation?

    Oct
    26
    posted by guest on Monday, October 26, 2009 at 11:35am Categories: Blog

    Money

    Editor’s Note: Hooi Yen is a corporate lawyer who advises on investments, mergers, acquisitions and general commercial agreements.  She experienced the tumultuous world of start-ups with Zuji and one of the hats she now wears is that of an adjunct associate for entrepreneurship studies at a polytechnic.  She can be reached at chinhooiyen [at] gmail [dot] com.

    On 13th October, dramatic headlines on the impending death of innovation made its rounds of the news.  One such article, published on www.straitstimes.com, pronounced that “The number of US venture capital firms that raised new investment money sank to a 15-year low in the last fiscal quarter as a drought of funding threatened innovation around the world”.

    The report is based on a press release by Thomson Reuters and the US National Venture Capital Association (NVCA) that approximately US$1.56 billion (S$2.18 billion) was raised by 17 venture capital firms in Q3 2009.  This represents the smallest number of venture funds raising money in a single quarter since Q3 1994 and the lowest level of dollars committed since Q12003.

    While I can understand the concern within the venture capital industry, it would be quite a stretch of the imagination to pronounce the very death of innovation itself.

    Who are entrepreneurs?  People who identify market gaps and marshal resources effectively to fill the gap.  They are not going to stop innovating because of the lack of easy investment funds.  Indeed, what we may be able to look forward to in the next few years is for necessity to breed invention, and for innovative and deserving businesses to be funded.

    In fact, let us look at those numbers again.  According to the NVCA and Thomson Reuters, between 2004 and 2207 the amount of funds raised by VCs increased from US$19,154.4 million to US$36,064.9 million-an increase of 186%.  According to the US Patents and Trademarks Office website (www.uspto.gov), the number of utility patents granted during the same period rose from 356,943 to 456,154-an increase of only 27.8%.  Therefore, perhaps it is safe to say that one thing money cannot always buy is innovation.

    Closer to home, the IPOS website states that the number of patents filed in Singapore by local based entities increased every single year between 2001 (523 patents) and 2003 (626 patents), despite the bursting of the internet bubble and SARS.  It seems as if those darned Singaporean inventors just kept on inventing even when the capital markets stumbled.

    As a young lawyer during the internet bubble of the late 90s, I attended some industry events and met dozens of keen entrepreneurs.  And frankly I could have sworn that there were many knowing winks exchanged as to some of the outrageous businesses that raised money in an industry awash with hype and not-so-smart money.

    Since those crazy days, the entrepreneurship scene has developed as a serious discipline with focused teams building real businesses.

    In short, I think we will survive.  The ease by which VC firms raised funds in the past was in part due to a bubble in the VC industry. The smart entrepreneur also knows that VCs are not the only source of funding available and that a fantastic idea will attract the necessary funds from under the mattresses of those shy limited partners.  In fact, some entrepreneurs even have the cheek to build successful businesses without VC money.  Just ask this little company called Dell. So innovation will not die and I guarantee we will all live to see another bubble.


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