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As venture capitals cut back on funding, VCs get creative with discovering the next hit


The landscape for venture capital has evolved and there’s less money floating around, revealed David Liu, co-head of Digital Media and Internet Investment Banking at Jeffries & Company, Inc., during the ad:tech panel, “Follow the Money: Investors Place Their Bets on the Future of Advertising.” But investors are willing to bet bigger on fewer startups. It’s finding startups worth investing in that is the hard part.

Liu says that the valuations of tech companies are lower than pre-recession levels with capital quickly leaving the equity market due to the bearish consumer sentiment in investments like stock for example. Facebook and Zynga’s IPOs haven’t helped to boost consumer confidence in the equities market, especially among tech investors. Liu notes that Internet IPOs this year are stagnant. Of course since this is the case, among of the places that their money can be held, short of hiding cash under the mattress, investments where the returns on their money, if any–like savings accounts–are negligible.

To paint a simple picture of what I mean is that today, even years after the recession hit in 2008, interest rates in savings accounts offer near-zero returns. The annual percentage yield (APY) for many banks are a dismal 0.01 percent, meaning for every $1000 invested in your savings account per year, your bank is paying you 10 cents. But in the investors’ eyes in today’s market, it’s better to play it safe than sorry.

With this in mind, venture capitalists are, now more than ever, having a harder time of raising money from wealthy patrons, says Liu, and in general there’s less money to experiment with. Jeff Crowe, General Partner at Norwest Venture Partners, adds that venture capitalists are finding that they’re themselves crimping on the number of companies that they’re willing to fund. On a positive note, companies are willing to invest more money into the fewer startups that make the cut. The problem is finding the companies that are worth investing in.

Norwest Venture Partners’ “hype” metric – the equivalent of social media mentions – is one tool that Crowe uses as a VC to filter through the sea of startups that will help to find the proverbial “diamond in the rough.” For example, as Crowe explained in a graph that presented the relationship between user growth (in blue) and social media mentions (in red), Pinterest’s growth has been steady, but its hype suddenly shot up in the past year to the extent that the rate of mentions has exceeded its growth. A quality of an underrated company that’s worth investing in, according to Crowe, is by recognizing when there’s laudable growth but the hype is lagging. He plugged the coupon site, RetailMeNot, as an example of this.

This article is part of Allvoices’ series on ad:tech, the largest digital marketing and technology conferences and expositions. Check out allvoices.com/adtech for more of Allvoices’ ad:tech New York event coverage. This series is supported by ad:tech.