Subprime Credit could help Venture Capital

With people wondering where the market is going to go, Venture Beat has come up with an interesting idea that the Subprime crisis that is currently underway could be a boon to venture capitalists.

People will put their money where they think it is safe, and venture capital into businesses that have a decent product, and have an adoption rate above zero might actually look appealing until the Subprime credit mess works itself out. Barring a deep recession, this might actually make sense.

There is one thing though, while money might flow into VC’s, the VC’s also have to do a good job of making sure that they invest in quality. No one wants to see another implosion of the VC market, and companies are shy about taking VC money in the first place.

With a credit crunch though, VC’s might be the only game in town, depending on how Angel investors manage their money as well.

Companies might find themselves between a rock and a hard place, with the only player on the block being a VC company.

Leveraged investing strategies were perceived as less risky. For the last five years, he watched the skyrocketing returns from hedge funds and buyout funds “with jealousy,” he says. However, now we’ve just witnessed a sharp shift in perception of the risk for those leveraged investing strategies. Investors will return to things like technology, technology IPO market, which is what really drives venture returns, and a reinforcing lust to invest in start-ups. Investors have finally demonstrated a willingness to buy technology IPOs. There were some 36 technology IPOs in 2006. He expects to see that number double this year: “In the middle of the liquidity crisis, VMWare went public, traded up sharply and stayed there.” Source: Venture Beat

The venture beat op ed is right here.

Investors are going to put their money where the risk perception is low, if VC’s do a good job, they could keep this going for a while, but the VC’s will have to keep the quality high to avoid another Y2K of tech companies going down the hill. That is what the real trick will be, keeping investor confidence in tech IPO’s so that they will actually survive and make money for their investors.

People remember 2000 and 2001 when they lost piles of money and retirement funds, VC’s will have to be extra careful this time around.