Venture Capital to Suppress Its Appetite for Risk in 2013

MK-BZ727_VENTUR_D_20121225181506According to The Wall Street Journal’s Pui-Wing Tam, internet entrepreneurs have had the upper hand over venture capitalists in recent years but that balance of power is now showing some signs of shifting, a trend that could accelerate in 2013.

Spurring the change is a dramatically lower appetite for risk from venture capitalists. Many investors rushed to get into Web startup deals in 2010, 2011 and in the early part of this year, often acceding to entrepreneurs’ demands for rising valuations in order to snag a stake in their companies.

But following the disappointing stock market performances of recently public Web companies Facebook Inc.,FB +1.78% Zynga Inc. ZNGA +2.07%and Groupon Inc., GRPN +4.45%venture capitalists are reining in their spending in areas like the consumer Internet.

That’s having a knock-on effect on entrepreneurs, who are having to scramble for a smaller pool of dollars and perhaps settle for a lower-than-expected valuation in the process.

“There’s been a definite slowdown in the pace of activity” of investment, said Todd Chaffee, a venture capitalist
at Institutional Venture Partners. He said that in the first half of 2012, startups would visit venture firms seeking a high valuation and “four or five firms would hit the bid. Now no firms hit the bid.”

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