Grazadio's Paglia Says VC Spending Will Remain Weak

If you're thinking about striking out on your own with a business idea that could be a great success as long as you procure the funding to back it, you may want to wait a bit longer to proceed.

John K. Paglia, an associate professor of finance at Pepperdine's Graziadio School of Business and Management, recently wrote in VentureBeat about the Pepperdine Private Capital Markets Study. The report found that "private capital lenders and investors may not engage in a meaningful volume of lending for another two to three years," he said.

High expectations for returns on investments are part of the reason. Paglia reported that venture capital firms expect an annualized 42 percent ROI; private equity groups expect 25 percent.
Paglia predicts that firms' reluctance to lend money to businesses that may not be able to deliver on the ROI will negatively impact the economy:

Recent reports from the U.S. Department of Commerce suggest the economy has finally stopped cratering....Historically, investment in early stage growth companies takes off at the start of a recovery and contributes significantly toward leading the country out of a recession.

Paglia offers some information that should encourage VCs to open their wallets: job creation from startups is less "volatile and sensitive" to economic downturns. Furthermore, he writes, "More than half of the companies in the 2009 Fortune 500 were launched during a recession or bear market, according to a report from the Ewing Marion Kauffman Foundation."

Paglia concludes that while VCs will continue to be cautious in their investments, it would benefit everyone if they became a bit more munificent:

If the economy is going to recover at a reasonable pace, private capital lenders need to set aside their lofty expectations and take on greater exposure. The company they save, ultimately, may be their own.