There is discussion tonight around the blogosphere regarding the potentially positive impact of the credit crunch on the venture capital flows.
Based on the history of past cycles, like the post dot com bust and 9/11 era created the low interest rate environment that fueled the inappropriate allocation of capital to the housing market. Some would also argue this led to an overfunding of the private equity market. It’s likely a healthy development to see some of this capital shift to potentially higher return projects. The question is will they be Internet, green or mobile search/advertising related? Nobody can say for sure which one will take the lead. Fortunately, I’m in touch with some good ideas in all of these spaces if anyone is looking for early round ideas to fund.
The credit squeeze would only help venture capital if the amount of available funds stayed the same but shifted out of equity markets. It wont. The amount of available funds will diminish for two reasons,
1. There was never as a much as the highly geared figures produced. When the leveraging reduces so will the number.
2. There will be a risk aversion. Venture capital is risky. It will dry up.