Is Venture Capital Dead?

Even with the stock rebound, the second quarter was the worst quarter for U.S. venture capital investment since 2003. Overall venture-backed investment fell 57% from the second quarter of 2008, says Dow Jones’ VentureSource today. That’s roughly $3.6 billion worth of VC out of the market.

“Venture capital investment has all but dried up,” writes our tech adviser Patrick Cox. “There are two primary causes. One is purely psychological. In a steep downturn like this, investors who should know better get nervous and hold capital. The other, which will be longer lasting, is the ‘crowding out’ effect. With government debt at record highs, capital is being sucked up by the Fed to finance its borrowing.

“This, ironically, presents an enormous opportunity for the VC players who are still investing. With so little VC money on the table, those who are willing to make deals are making great deals. This is exactly the time to be in the VC business.”

But the venture capital market in Brazil is alive and kicking. VC investment has more than quadrupled there since 2004, says the Brazilian Association for Private Equity & Venture Capital today. The market was a measly $6 billion then. VC investment totaled $28 billion in 2008.

The Daily Reckoning