How will the credit crunch affect VC

For Spring Break I went to visit an old friend in Thailand, I had a great time lounging around, going to the weekend market, and doing a bit of work on his startup on the side. On the flight back to New York I ended up getting seated next to a gentleman who had been in Thailand to race his two person yacht. We struck up a conversation, and he asked what I did and I said I was in business school.

Him: "It must be tough finding a job with the current credit crises."

Me: "Well, I’m interested in venture capital, and fortunately that is counter cyclical."

Him: "Actually venture capital is counter cyclical in an expanding credit market, when credit is contracting like it is now it becomes cyclical."

Me: "What exactly is it that you do?"

So it turns out he does risk management for the wealthy at large banks such as Morgan Stanley. Needless to say I was a bit bummed, but then again his job is to forecast the gloomiest scenario and then protect his clients from that. It probably doesn’t lead one to see the cup as half full.

Today Brad Feld had a post regarding contrary views on the future of venture capital. There was one piece of it that particularly caught my eye:

Merrill Lynch’s chief strategist Richard Bernstein in "Some thoughts on alternative investments (6/23/08)" says "The growth in alternative investments seems linked to the growth of the credit crisis" but then goes on to say "There may be two areas of alternative investments that seem relatively attractive in the current financial environment.  In both cases, these are areas that might benefit from the tightening of global credit.  The first is early-stage venture capital.  … If return-on-investment does indeed tend to be higher when capital is scarce, the significant tightening of traditional credit funding to smaller companies seems to make early-stage venture capital strategies more attractive."

So now I have heard opposite opinions on the affect of a credit crunch on venture investing. I’m curious to find out which of these is the accepted wisdom.

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