The rise of social media had inflated a mini-bubble in the venture capital market and starved other entrepreneurs in the technology and internet sectors of capital – which is good news for venture investors with a contrarian bent. As social media hopefuls absorb thinning inflows to the venture capital universe, only “one out of 1,000 – or 10,000 – will be a Facebook or Twitter,” said Cameron Lester, founding general partner at US venture firm Azure Capital Partners. Still, these enterprises draw commitments from many investors, and then capital “dries up” quickly, he said. In 2010, US$11.6 billion was raised, surpassing only 2003 as the industry’s worst fundraising year, in which US$10.4 billion was committed by investors, according to Dow Jones VentureSource.

All of this means entrepreneurial businesses outside the melee of social media have had to fight hard for venture capital funding in the past two years, Lester says. Moreover, most venture investors now aimed to invest in companies that were on a clear exit path, or whose businesses sought expansion capital, rather than backing start-ups in search of something more than seed capital, Lester said. He said these fledgling companies, which usually generated between US$3 million to US$7 million in annual revenue, tended to be out-of-favour at the moment and the best among them could be worthwhile investments.

“These entrepreneurs are trying to build real businesses. They know that capital has a cost. And if they have funding, they know they are in a better position than their competitors,” said Mike Kwatinetz, also a founding general partner at Azure. Structural changes within the technology and internet markets favoured these investments, said Kwatinetz and Lester, who believed a “multi-year wave” of merger and acquisition (M&A) activity had begun and could provide better exit opportunities than the listed market. This new wave of deals would be driven by large technology companies in search of new and innovative technologies, such as cloud computing. Many of the technology world’s giants – Microsoft, Google and IBM – had pared back research and development spending since the 2008 downturn, the partners said. During the previous bear market, which was induced by the technology bubble, many of these companies continued to put money into new ideas and soon found themselves hard-up as the bad times continued.

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