A Record Broken in VC Land

Let’s face it. Much of what we know to be Web 2.0 wouldn’t be where it is if it weren’t for the heavyweight group of backstage masters known as venture capitalists; some being angels, more being in it for the substantial returns. So rather than heap praise on the developers and the late-night coders and community sourcing here, I’ll be bringing to your attention the venture capital community. After all, it’s important to note just how important they were to web development over the past year. So important, in fact, that they managed to break 2001’s funding record.

Lots of zeroes and commas passed hands over the past 12 months. $28.5 billion worth. In total, SFGate’s “Tech Chronicles” stated 200 funds in total dished the Benjamins; the fourth quarter alone saw much of that money – 72% of it, to be somewhat precise, taking into account both funding and buyouts.

We know some of it went to sites such as Digg ($8.5m) and Meebo ($4m to start; recently adding $9m), with less-known but still attractive investments like Weebly and ChaCha taking smaller but still generous portions of 2006’s pie. But figures mean little, especially when billion is the new million. What does the record amount exchanged last year mean for the Web, its major players, and the long tail of startups and small ops? Was it just another round of stargazing, with little to back up the highfalutin’ values analysis and “appraisers” put on Silicon Valley’s latest set of wonder boys – and gals? Or did the funds play it more safely, more cautiously, and most important of all, more intelligently? Like most of you, I’ve got my suspicions, but I’m leaning toward the latter nonetheless.

Without some measure of hindsight, one can rarely know for sure whether a bubble is en route to bursting or if it’s security is kept in check, kept in a place where expansion and contraction are working hand in hand with market forces to ensure erratic activity is kept at a low. Despite the apparent frenzy around 2006’s best apps, services, and corporations, I don’t think we’re in store for another crash. Why? Because we’ve caught up, and few are fooled twice.

“What do you mean, we’ve caught up?”

I mean we’ve freed ourselves from the Hollywood western that was the tech industry’s Y2K. Like the cardboard storefronts and saloons, the Valley was saturated with gamblers investing in barren outfits with glitzy signs. Upstarts would draw the curtains for a bit of show and tell, but there was too much tell and not enough show. Now there’s more. A lot more. Sure, some are still asking for quick cash, and someone’s bound to be harking with hope, willing to lay with some very risky red flags, but there are exceptions in any other industry. The tech world is no different.

In 2000, Wall Streets dreamers were throwing green at any empty shack with a laptop, messenger bag, and sprightly young chap huddled inside. Today, “big ideas” are vetted. Thoroughly. Yes, there are companies failing to turn profits after several years, but they are few, and some are rather close to putting those first big smiles on funders’ faces. Some will make it, some will fail. There are no guarantees. But when the values are now measured code-deep rather than assessed through a front-end snapshot, there’s reason to say, “Hold on. There’s something worthwhile here.”

I don’t know who’s going to turn corners this year or the next, who’s going to stop taking checks and start writing them. That is for those respective parties to decide. Whether they remain healthy and standing or fade away is up to them. And the worry about Bubble #2 isn’t entirely unfounded. When you take a look at recent headlines declaring a 2001’s VC record broken at a moment that looks a lot like five or six years prior, there’s bound to be a little lip biting. But while garages were once stamped with repute with little thought to what resided within, it is now earned, denied, and rescinded based on the principle of, “What have you done for me lately?”

Hopes and dreams can still become realities in the age of Web 2.0 and its global growth spurt. Only, now the investors want to see the engine underneath, rather than just the show coach.