The cut throat competition in the search and portal markets between Yahoo and Google is causing a draught in the venture capital investments, claims investor Tony Conrad in the San Jose Mercury News.

Last year Conrad reluctantly sold his shares in a company called Oddpost. The startup had developed a better online email application and was quickly purchased by Yahoo.

Neither the company itself or its investors had been planning to sell out at such an early stage. It's better to let the business mature and get some revenues because that gets a much higher sale prices. But Yahoo made an offer they couldn't refuse.

Because Yahoo and Google don't have much patience in waiting for startups to mature, they are effectively driving down profit margins for venture capital investors. As a result those investors are starting to look at different market altogether and are creating a drought in innovation and investments in the portal area.

The whole thing inevitably should level out at some point. If an overly aggressive acquisition strategy causes a drought in VC funding, there soon will be nothing to acquire. Or Yahoo and Google will have to set up their own VC funds to fill the void.

Droughts tend to make victims

Tags: Yahoo, Google, venture capital

23 Nov 2005