Wednesday, October 13, 2010

Tech Executives - VC Model "Permanently Altered"

By David Gross

Ernst & Young has come out with an analysis which shows that just 163 venture firms made investments in the first half of 2010, down from 313 last year.   While the number of IPOs is up over last year, a general sense of discouragement has hit the venture industry, with 60% of technology executives telling law firm DLA Piper that the venture model is "permanently altered", according to this article from BusinessWeek.

Even though industry leaders like Equinix (EQIX) and Rackspace (RAX) were venture-funded, this is still mostly a non-event for data center service providers, because there is so much capital coming into the industry from private equity, the credit markets, traditional bank debt, and secured loans.   In just the last week, we've seen $369 million invested in i/o Data Centers and DuPont Fabros (DFT), comprised of preferred stock, bank debt, and an equipment loan.   Even in the boom years of the late 90s and 2000, venture investors rarely invested in deals of this magnitude, with most large B and C rounds then topping out around $80 million.

Data center technology suppliers are also somewhat isolated from the ups and downs of the VC market, because distribution is usually far more of a challenge than financing for any hardware startup.  Just about anyone coming into this sector needs relationships with someone like IBM (IBM), HP (HPQ), Oracle (ORCL), Dell (DELL), or some kind of distributor regardless of how much they've raised.   

I've made the point in other posts that this industry is unusual in its ability to attract capital from such a wide variety of financing sources.   If one of those sources becomes "altered", there are always other options.

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