Venture Capitalism in 2008/2009 During the Economic Downturn
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In the first quarter of 2008, venture capital remained strategically strong despite the failing economy. However, by the end of that year, there seemed to be an overall change in the trend of those investments. Though VCs were still actively investing, they approached investments more prudently and at a much slower pace.

Normally, venture capitalists will fund a project for five to ten years. Once that given period of time expires, the company has the option to exit through acquisition or through initial public offering (IPO). But since many venture supported companies remained weak in sales, marketing, and distribution during the economic downturn, there has been very limited opportunities for VCs in the exit market.

Mark Heeson, the president of NVCA, has said that the slowdown approach taken by VCs is the result of a “shuttered IPO window and slowing M&A market for venture-backed companies which deteriorated in 2008.” Such slowing investments have resulted in 583 deals from 673 the previous year. That generated a total of $7.37 billion compared to 7.94 billion in 2007.

Some signs of the troubled economic times are the cutbacks seen within companies. For example, executives at venture backed startups have postponed any prospective expansion projects as well as employee recruitment plans. They have even taken an active approach in reducing overall company expenses and have made voluntary pay cuts, all in an effort to survive in this down economy.

However, one major market sector that has been flourishing during this recession is clean technology, which rose in investment of 54% last year. In fact, seven of the ten largest VC deals in 2008 were in the clean-tech field. VCs favor the fact that these companies have the potential to move forward. Consumers are also willing to adapt to a more green and clean approach to living, making this area extremely successful and the fastest growing sector in VC investments.

In 2008, CA, MA, and NY were named in the top ten states for venture capital financing. Surprisingly, New Mexico is the state with the fastest growing region for venture capital nationwide. According to Heeson, this steady flow of investment is accounted for by the emerging clean technologies and life science technologies from local universities and laboratories, which makes it very attractive for VC investors.

Despite the economic downturn, venture capital investments still remain, but at a much slower pace. They are also expected to provide support to their existing companies over financing new endeavors. Entrepreneurs, in turn, will be hit the hardest as they struggle to find funding for their startups. This will make 2009 a year of great speculation and anticipation for many investment experts.

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