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New venture investment signals slow growth

Venture Capital firms raised less money in the first quarter of 2010 than in any period since 1993, reports the Kansas City Business Journal.  The slow growth in the economy combined with a less favorable overall market contributed to reducing investment in new firms, even as the Dow Jones Industrial Average breached the 11,000-mark today.

The National Venture Capital Association and Thomson Reuters released a report Monday saying that 32 funds raised a combined $3.62 billion during the three months ending March 31. That’s down 31 percent in terms of dollar commitments and 44 percent in terms of the number of funds, compared with a year ago.

“Over the last two years, alternative asset allocations have declined, and the exit market has suffered, putting venture firms in the unenviable position of communicating their value in an extremely challenging environment,” NVCA President Mark Heesen said in a prepared statement. “Many firms have been waiting until the exit market improves before embarking on their fund-raising efforts. This wait has been considerably longer than many firms anticipated.”

This creates a problem for job seekers:  New businesses are among the biggest new job providers in America, and without the funding to get started, job growth is certain to remain sluggish, despite signs of economic recovery.  Sure, $3.62 billion seems like a lot of money but, when one considers that for every Google there are dozens of companies we never heard about because they went out of business or were acquired at a loss, it’s actually quite disappointing for the number to fall-back to a 17 year low.

Prepare for the possibility of a long, hard slog back to 7% unemployment.

This is indicative of why watching the Dow and simple GDP numbers is not sufficient for understanding economic vitality.  In fact, much of the GDP growth seen in the past several months has been from government deficit spending and temporary programs.  Straight GDP-growth as a measure of economic activity doesn’t fully capture the big picture, just as watching the Dow isn’t sufficient for understanding the markets.  Watching these two indicators would be akin to reading a single book of the Bible and deciding on the nature of Christianity.

As long as investment is down, GDP growth, job growth and the overall economy will remain sluggish.  After all, if the small businesses and corporations don’t have capital to spend on new business, they’re not going to invest any capital in new growth programs.  Without growth, why hire new employees?

With threats of taxes on capital gains and Cap & Tax, the certainty of increased taxes with the Health Care Takeover and myriad other Leftist tax-and-spend items in the agenda of the Administration and Congress, why would anyone want to invest in the United States?  Why not wait for a better economic climate before investing?

Cross-posted at The Minority Report Blog.

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