March 3, 2010

Venture Capital Drought? Not So Much.

Michael Feldman

The demise of more than a dozen HPC vendors in 2009 turned out to be one of the big stories of the year — at least according to me. A few of these, like SiCortex, closed their doors because they failed to secure another round of venture capital (VC). Others, like DRC Computer Corporation, were rescued before their funding run out. And just this week, we saw funding evaporate for former HPC server maker Liquid Computing.

So as we come out of the recession (cross your fingers) how does VC funding look for would-be technology disrupters in the decade ahead? According to a recent article by James Surowiecki in Technology Review, there’s plenty of reason to worry about the venture capital model. But according to the author, the main problem is not the lack of money — there’s plenty of that to go around. The real issue is that there is simply too much venture capital chasing too little innovation. Writes Surowiecki:

The industry as a whole now has about $200 billion under management, more than twice what it did in 1998, and venture funds invested $20 billion to $30 billion a year for most of the past decade. And on the level of individual funds, huge amounts of capital combined with falling startup costs have, in ­Anderson’s words, made funds “muscle­bound”…

During that period, VC investors essentially broke even, which is certainly not what they were shooting for. From the investor’s point of view, the challenge is that demand for funding is down. That’s because the cost of booting up an IT company is a lot lower than it was a decade ago, thanks mainly to ”open-source software, the globalization of engineering, the commodification of bandwidth and infrastructure.” At the other end of the pipeline, successful private companies, for a variety of reasons, seem less interested in going public, which is traditionally how VCs cash out.

While this obviously presents challenges to the VC community, it’s actually good news for startups, HPC or otherwise. Although venture capitalists are going to be more wary than in the heady days of Silicon Valley in the 80s and early 90s, there should be plenty of money on tap for deserving ideas.

A companion piece in Technology Review, penned by VC investor Steve Jurvetson (of Draper Fisher Jurvetson) presents an even more bullish view. From his point of view, tech innovation is in perpetual motion, and VCs like him will be needed more than ever. Jurvetson seems especially focused on bleeding-edge technologies, like synthetic life and quantum computing. (Not coincidentally, his firm is an investor in quantum computer maker D-Wave Systems.) He says 2010 will be the year of the first scalable quantum computer and the first synthetic life form.

According to Jurvetson, they’ve actually been seeing a better quality and diversity of proposals in his office during the current economic downturn, noting: “Scientists do not think more slowly during recessions.”