Show Us the Money

In this week's cover story, NEWSWEEK business columnist Daniel Gross writes about the "safety bubble": the dangers of Americans turning too abruptly to too-safe investments after a generation of risk-friendliness that powered the U.S. economy. Avoiding risk feels like the right thing to do these days, but it does carry consequences. One of these can be found in the venture-capital industry, which appears paralyzed—with the stock market in the dumps, startups fear they can't stage successful IPOs, and they have similarly bleak hopes of a lucrative purchase by a bigger corporation. Afraid they won't realize a return, the institutions and wealthy individuals who invest in venture funding are pulling back their infusions of cash. That, in turn, means more fledgling startups are struggling to find enough capital to grow.

It's a bad cycle, especially given the historical role of innovation and entrepreneurship as the lifeblood of the U.S. economy. From Cambridge, Mass., to Menlo Park, Calif., venture capitalists are riding out the storm. This week, several spoke to NEWSWEEK's Nick Summers. Excerpts:

Tony Conrad, venture partner, True Ventures:
Summers: What's the state of the venture-capital industry?
Conrad: Like anybody you talk to, we all think this is quite severe. And it's still quite fluid; we're not really sure where it all knits out. Nobody's being flippant and suggesting that this is just a little short-term cycle and things will be back to a really good spot. This one's a little different than what we lived through in 2000 and 2001—what I call "the dress rehearsal." Then, it was the tech market that dragged down the overall. In this case, the tech market is pretty healthy and is being dragged down by the general economic backdrop.

What will happen in the next few months or years?
From our vantage point, the current correction—we don't want to go out on a limb and say it's a great thing, but it's not a bad thing from our point of view. What would be a bad thing is if, five years from now, you and I are having the same conversation. No matter how deep our checkbook is, that's problematic for everybody.

Is there reason for optimism?
It's a great time to start a business in a down cycle, because if you manage your capital efficiently and build the right infrastructure, hopefully, as that business gets healthier and gets in a position to become well-capitalized for the right reasons—because it merits being capitalized—you're emerging in a market that's starting to open up. There's optimism, and the loosening of the checkbook, and the capital flows.

Arnie Oronsky, managing director, InterWest Partners
Why is venture capitalism in trouble right now?
In order to make venture capital work, you have to put money in, build companies and then get out of the companies, either by getting them public or selling to bigger companies. A major way to do this is to get it public. There is zero opportunity to take companies public today. So one extremely important source of money to build a company to profitability is now gone for the moment.

If investors are becoming reluctant to back VC funds, what's the implication for the whole economy?
Venture capitalists are the highest-risk investors, the highest-risk people. If a venture capitalist is starting to get risk averse, this is like an unbelievably bad sign. Because if the venture capitalists don't want to take a chance, I don't know who in the world would.