Volatility's Impact on the Venture and Angel Markets

This has been a tough week for the markets. with the DJIA down more than 10% from a month ago, and gyrating by 200 to 400 points a day.  I've read multiple comments on the impact of the pullback and increased volatility on private markets and the consensus seems to be that there is none-- it is not clear whether venture investors will pull back, keep investing or run for the hills.  A few thoughts that might impact the decision follow:

1. The IPO Window.  2011 has been a banner year for IPOs, with high profile launches (LinkedIn) and major players in registration (Groupon and Zynga). At least six registrants postponed this week (including HomeStreet, InvenSense, TIM, Wageworks).  However, the prevailing opinion seems to be that if the market drop is arrested, the window will reopen.  Indeed, Carbonite priced this week, albeit at the low end of the range.  Even a slightly open window should cheer venture investors and encourage them to keep taking bets.

2. This is not 2008 (so far).  One of the most significant impacts of the market meltdown in 2008 was that pension funds and other LPs were significantly overallocated to venture, which caused them to reallocate and reduced fund inflow in 2008, 2009 and 2010. First, that reallocation has already occurred, and second, the market pullback has not been as severe, meaning that we are unlikely to see the same rebalance.

3. Fund investment cycles are hard-wired. Venture funds don't have the luxury of hanging out, not making investments, and waiting for the markets to come back. Capital has been committed and must be spent. Valuations may drop (which is probably good for LPs), but investment flow should not be adversely impacted.

4. Angels are the great unknown. One of the most significant changes in the post-2008 (and really post-bubble) startup investment market is the increased impact of angel investors, particularly in Silicon Valley, but also in Atlanta and elsewhere. As venture investors have moved upstream, angels have stepped in to fill the breach. Now many angels have taken a significant hit to their net wealth. Will this slow their investment interest? Time will tell.

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