It's a measure of Venture capital flows
Re-post of Ben Horowitz
A basic driver for a private technology market bubble is the over-supply of venture capital into the sector. If too much venture capital hits the streets, valuations will bubble up. The inflation-adjusted data from the last bubble tells the story:
In the 3-year period from 1998-2000, venture capital firms raised more than $200 billion, which represented about 0.55% of the national GDP. To put that in perspective, that’s more money than the entire venture industry raised collectively over the prior 18 years.
Flush with lots of capital, venture capital firms naturally invested at historically high rates—from 1998-2000 alone, venture capital investments also topped $200 billion. Again, more dollars were invested in this single 3-year period than in total over the prior 18 years.
Now let’s take a look at the current version of the same inflation-adjusted data:
Total venture capital raised from 2008-2010 was just shy of $55 billion, about 0.12% of the national GDP, with the trajectory of capital raising declining in each year. In fact, 2010 venture capital fundraising is at the same level as it was in 1995 and 1996.
Approximately $90 billion has been invested by the venture capital industry from 2008-2010—less than half of the 1998-2000 level. More significantly, total capital invested should continue to remain constrained in light of the significant reduction in new venture capital dollars raised over the last 3 years. Keep in mind that because the life of a venture capital fund is generally 10 years, it takes a while to see the impact of lesser fundraising on total dollars invested.
The inflows don’t actually look that bubblicious.
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BG