The credit crunch could help venture capitalists

The current credit crunch caused by the subprime loaning crisis may help venture capital returns, and therefore start-ups.

That’s the argument of venture capitalist Keith Benjamin, of San Francisco’s Levensohn Venture Partners, as posted on his blog a few days ago, and which has been picked up by several publications, including this morning’s New York Times (the Times runs a cute graphic of a detour road sign in its story.)

Coincidentally, we asked Benjamin to write a post about this for VentureBeat. He has done so, and pushes the argument forward in a second post that we’ve published, about how tech stocks are returning to favor.

His basic argument is as follows: Investors shied away from tech stocks for years, fearing the post-2000 bubble risks. Leveraged investing strategies were perceived as less risky. For the last five years, he watched the skyrocketing returns from hedge funds and buyout funds “with jealousy,” he says. However, now we’ve just witnessed a sharp shift in perception of the risk for those leveraged investing strategies. Investors will return to things like technology technology IPO market, which is what really drives venture returns, and a reinforcing lust to invest in start-ups. Investors have finally demonstrated a willingness to buy technology IPOs. There were some 36 technology IPOs in 2006. He expects to see that number double this year: “In the middle of the liquidity crisis, VMWare went public, traded up sharply and stayed there.”

Notably, venture capitalist Stu Phillips predicted something like this eight months ago, in a column at VentureBeat, focusing on the likely correction in the buyout/private equity world. In an extreme case of bad timing, perhaps, he gave up raising a venture capital fund two months ago, before the credit crunch hit. At the time, he blamed it on the fact that investors were too focused on private equity to care about investing in another venture firm. Wonder if that’s changed.