Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.
An entire library could be filled with books about how the bright minds in Silicon Valley find and fund the next Google or Facebook. But there are four basic steps to startup investing:
1) Persuade people to give you lots of money.
2) Use that money to buy shares in young companies.
3) Cash out those shares in an IPO or acquisition.
4) Return to the people from step one (if all goes as planned) a much larger pile of money than what they gave you. Keep some for yourself.
But the basic mechanics are sputtering.
There’s no problem with steps one and two. U.S. venture capital funds devoted to startup financing collected more money in 2016 than any year since the dotcom bubble, according to data from research firm PitchBook. And venture capital funds wrote $101 billion worth of checks to startups last year, a new report by CB Insights and Pricewaterhouse shows. That was (sensibly) a big step down from the global startup funding mania of 2015, but it was still historically very high.
So these two charts show loads of money continues to flow into young companies — and much more has to come in future years, given the giant piles of investment money being collected by startup financiers. But the amount of money being cashed out — step three — is…