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The crisis in venture capital

The global venture capital industry is currently in the most severe crisis of its history. According to Dow Jones VentureSource total investment fell by 36% in 2009. Outside the USA the picture is even bleaker with a fall of 51%. A consensus is emerging that this is a structural change, not just a cyclic phenomenon. A June 2009 report by the Kaufmann Foundation predicted that total assets under management by venture capital firms will contract by 50% from $24 billion to $12 billion over the next few years.

At the same time as the overall sums are shrinking, the pattern of investment is also changing. Funds have increased allocations to existing portfolio companies and focused new investments on lower-risk segments of the market. On the one hand funds are making small bets on seed-stage ventures. On the other hand they are making big investments in late-stage businesses that are either profitable or close to profitability. According to research by Deloitte:

“We’re seeing reduced investment levels as firms either invest smaller sums in very early-stage companies, or invest traditional sums in fewer and much later-stage companies. The middle ground has been largely vacated.

These changes are opening up a chasm in the £500,000 to £2 million financing range. Innovation is urgently needed to provide entrepreneurs with alternative ways to raise sums in this range. Trampoline believes crowdfunding is the best solution to bridge this funding gap and will become an established technique in the venture landscape.

Crowdfunding in a nutshell

Crowdfunding is an alternative approach to raising finance. It’s evolved over the last decade, first in the film and music industries, then in journalism and now in venture finance. Unlike traditional models which rely on large commitments from one or two institutions crowdfunding is based on raising smaller sums from lots of people, who may be linked by social networks or shared interests.