VC funding: Don't believe the WSJ's naysayers

If you read the Wall Street Journal, you could be forgiven for thinking that the venture-capital market is starting to crack at the seams. It's a striking premise, all right. Just one problem: it's wrong.

Earlier today, the WSJ reported that argued startups are now having more trouble raising cash than in the not-so distant past. The Journal pointed to Naval Ravikant, an entrepreneur and operator of AngelList, a site that lets nascent companies ask VCs for capital, who said that even though 50 to 100 startups are applying for funding each day, "only one to two are getting financing."

What's more, the Journal says, the trouble appears to be spreading across the entire industry, and could have a profound impact on the ability for any startup to raise the cash it needs to build its business.

Dire stuff, if true. But VCs were quick to cry foul, insisting that they're not seeing the same trouble the Journal is.

"So, is there a 'cash crunch' for Web startups?" Fred Wilson, a venture capitalist and principal of Union Square Ventures, a firm with investments in Boxee and Tumblr, among others, asked in a blog post on the matter. "Not that we are seeing. Our portfolio companies have all been able to finance themselves when they have wanted to. And we have made more investments this year than any year we've been in business (maybe 10-20 percent more, not 2x more)."

Chris Sacca, another prominent investor that has doled out cash to Twitter and Instagram, among others, took to Twitter to say that he "definitely" didn't agree with the article.

"Valuations are still high and I haven't seen evidence of a cash crunch," he tweeted.

Here's the thing: The WSJ's Pui-Wing Tam looked primarily at seed funding, which tends to be considerably more volatile than venture funding as a whole. For the most part, venture capital firms have been willing to give out cash to fledgling startups, since they typically ask for small sums and thus limit the risk to VCs. In other words, over the years, that segment of the startup community hasn't necessarily reflected the state of venture funding.

To get a better sense of trends in VC, you're probably better off looking at the entire market might be more appropriate. And in that case, things are actually going quite well for startups.

Just yesterday, research firm CB Insights reported that during the third quarter of 2011, venture funding hit $7.9 billion, putting 2011 on pace to reach the highest level of investment in more than a decade at $30 billion this year alone. The research firm added that 790 companies received funding last quarter, easily outpacing the third quarter of 2010 when 715 companies received a cash infusion.

Moreover, CB Insights CEO Anand Sanwal told CNET in an interview that the venture capital market looks quite strong for seed investment and late-round financing. It's the middle area, namely the Series B and Series C rounds, where startups might face some trouble raising funds, Sanwal said.

That sentiment was echoed by Dave McClure, founder of 500Startups, a company that invests in early-stage companies.

"Increased incubator, seed deal volume is sustainable," McClure tweeted out late last night. "High-valuation Series B/C (financing) is not sustainable."

Even so, there are some companies capitalizing on the high-valuation craze. Just last month, microblogging provider Tumblr announced that it had raised $85 million in a round of financing led by Greylock Partners and Insight Ventures. Earlier this year, Facebook reportedly raised $500 million from several firms, including Goldman Sachs and Digital Sky Technologies, on a valuation of $50 billion.

A look at venture capital funds
But the Journal didn't limit its analysis to startups. Tam also cited a study released this week by the National Venture Capital Association (NVCA) that found VC firms were only able to raise $1.72 billion in the third quarter, a 53 percent decline compared to the $3.6 billion they raised a year earlier.

What's odd, though, is that the WSJ didn't note that VC fundraising so far this year is up 26 percent--to $12.2 billion--compared to the same period last year. The Journal also argued that VC funding is down compared to the the height of the dot-com boom, from 1998 to 2000. Given how crazed the startup scene was at the time, that's hardly a fair comparison.

The fact is, the VC market appears to be alive and well. And although it might not be as active as it was in the late-1990s or 2000, startups with strong ideas are still raising capital.

It's that last bit--strong ideas--that is perhaps most important to keep in mind. Anyone can build a startup, but in an efficient market--which, at times, the venture capital industry has not been--firms with good ideas will be able to raise money, regardless of the state of the economy or the funds available to the VC firms.