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OECD predicts major slowdown in venture capital funding in 2001 Back  
The OECD has predicted a major slowdown in the availability of venture capital in 2001 in its most recent economic report.

In Financial Market Trends No.78 the OECD said although 2000 had seen a high level of investment for venture capital, the rate of returns had dropped significantly. This, coupled with the recent down turn in the markets would lead to a drop in venture capital availability during 2001.

The OECD reports that the drop in technology-related equity prices has had a significant impact on the venture capital industry throughout the OECD area. A general weakness of second tier or ‘innovator’ stock markets have created uncertainty about the feasibility and profitability of future IPOs, thereby sowing doubts about the exit strategies of venture capital investors. In Europe the evidence of this was particularly compelling in Germany, where providers of risk capital publicly voiced concerns about the weakness of the Neuer Markt.

In the United States, both inflow and outflow of funds to venture capital companies and the investments made reached an all time high in 2000. The activity slowed in the fourth quarter, but investment still reached a level above $20 billion. It may seem counter intuitive that activity has held up so relatively well, but market analysts have observed that inflows to venture capital companies largely reflect the observed returns to venture capital investment in the previous quarters. Since returns in 1999 were the highest in the history of US venture capital (according to the National Venture Capital Association) the quarterly return in 1999 fourth quarter was a staggering 59 per cent, it is not entirely inexplicable that total fundraising rose to a record $92 billion in 2000. It does, however, raise concerns about the immediate future of the industry because by the end of 2000 returns had dropped to around 5 per cent, far below the long-term average of 20 to 25 per cent. For these reasons, most observers predict an important contraction in the inflow of funds in the course of 2001.

The most remarkable slowdown in US venture capital activity in the second half of 2000 related to venture-backed mergers and acquisitions (M&As). The total value of such deals (including the share not financed with venture capital) fell to $14.9 billion, from $52.6 billion in the first half of the year.

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