Good News: Venture Capital Is Back

09/22/2010 11:43 am EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says VC investment is up nicely, along with initial public offerings, giving hope to investors and also, ultimately, job seekers.

Venture capitalists are back in the game.

While many big companies sit on huge cash reserves, individual investors, hedge funds, and others are looking for promising start-ups and finding plenty.

Venture capital (VC) investment will rise nearly 50% this year, to $26 billion, and will likely hit $29 billion next year. Of course, that follows a depressed couple of years after VC investment peaked at $100 billion in 2000.

One driver: new life in the stock market. VC investors get a return on their money when start-ups go public, and initial public offerings are in vogue again. So far this year, 88 companies have raised over $13 billion with IPOs, with lots more to come when firms feel the stock market is steadier. We see 125 IPOs raising $22 billion in 2011, assuming, as we do, no double-dip recession is ahead.

The boost in VC and IPOs means more jobs. Young firms account for 11% of private employment, or about 12 million jobs. Even in the slow years of 2006-2008, when the private sector grew just 0.2%, VC-backed companies managed a 1.6% growth rate.

Which sectors will see the most VC, IPO, and job growth in the next year? Retail, for one. Many firms will add stores and hire workers right away. They’ll take heart from some successful IPOs this year: Gordmans Stores (Nasdaq: GMAN) of Omaha, Neb., for example, raised $32.9 million to pay off debts and open stores in new markets.

Biotech and medical device firms receive the most in VC—a 43% jump in [the] second quarter

[of] 2010 over [the same quarter in] 2009. In one of the larger deals, Tesaro, a Boston pharmaceutical firm, landed $60 million from New Enterprise Associates to acquire, develop, and market cancer therapies and cancer care products.

Investments in pollution reduction and alternative energy doubled last quarter, thanks to government incentives. Boston-based 24M Technologies raised $10 million from the private sector and tripled its workforce to 30. And an IPO raised enough for Tesla Motors (Nasdaq: TSLA) of Palo Alto, Calif., a maker of electric cars, to plan 50 new sales outlets.

Especially attractive to investors are firms that offer Web security and business services. Kareo, a Calif.-based creator of Web-billing software for doctors, will double its staff to 40 with new VC funds.

More deals in these and other sectors are in the pipeline. And that spells good news for the economy as a whole.

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