Something’s Gotta Give

Back in New York City from several weeks in California. Much has been made about the divide between East Coast and West Coast investors. Perspectives on deal terms and sector strategies often vary, but the stark contrast in outlook between the two financial communities today is astonishing.

New York investors are seized in sheer panic, as global capital markets teeter on the brink of systematic failure. Sunday night’s Bear Stearns fire sale and historic Fed rate cut only confirm some of the worst fears. Meanwhile, many Silicon Valley investors exhibit only passing acknowledgement to the depths of the ongoing crisis.

Whistling past the graveyard, venture investors continue to plow tens of millions into richly priced follow-on financings, valuing nascent, relatively unproven cleantech and Internet companies well into the 9 figures. This at the same time far larger and more liquid public comparables plummet in value. It’s true venture capital’s timeline is by nature long-term. Great businesses will be built in spite of market boom-bust cycles. But we’re fooling ourselves if we think the global market melt-down will not impact venture capital portfolios.

It’s safe to assume: The availability of credit has and will continue to shrink (see: alternative energy ventures reliant upon project finance), consumer spending will be curbed (see: decelerating growth rates for consumer technology, internet advertising), federal budget expenditures will come under increased pressure (see: science & technology funding, renewable energy tax credits) and venture investors will be forced to re-price risk and valuations.

I do not believe the disconnect between public and private prices can last much longer. Watch for a downturn in valuations for later stage VC deals when new market realities finally sink in.