Just as today’s down economy has changed the way in which
angel investors conduct their business dealings, venture capitalists have
also taken prudent steps to ensure that their investments survive. The recession
has clearly affected the manner and pace in which
VC investments are made, and there is no doubt that a sluggish economy will
bring with it rather bleak investing as well.
According to a recent prediction survey conducted by the National Venture Capital
Association (NVCA), 2009 will be a slow year for venture investments. Of the 400
venture capitalists participating in the study, 92 percent predict that
investments will drop by 10% or more. This will more than likely produce an annual
figure of roughly 27 billion dollars, down from 30 billion the previous year.
As a result, young, innovative companies will be hit hard, as VCs provide more monetary
support towards existing investments and companies. This trend can be considered
an extremely wise move on behalf of VCs; since they invest large amounts of other
people’s money, they cannot afford to take the risk of supporting early stage companies/startups
which have not established financial stability. Many believe that investing in novel
products and technologies is too risky a move in today’s down economy.
In addition to the fund raising difficulties for
VC investors and entrepreneurs, VC exits have also struggled. Given the
current economic circumstances, VCs are preparing their portfolio companies for
these tough times. Expansion projects have been delayed, voluntary pay cuts and
layoffs have been considered, and restricted company spending is now at an all time
high. These efforts have been made to ensure survival and prosperity of VC backed
But when VCs do decide to invest, they
will most likely stick to market sectors with a proven history of success, such
as clean fuel and biotechnology. On the other hand, media and semiconductor markets
will more likely experience a decline. Such a downturn will not only affect the
US but will have global implications as well, with Europe being particularly hit
hard by the current economy.
The upside of the down economy is that it opens prospects to obtain great deals.
In fact, some VCs feel that the best time
to invest is during a struggling market, when both valuations and competition is
at an all time low.
Mark Heeson, the president of the NVCA, forecasts that 2009 will be a year of “Darwinian
change.” Companies and
venture capital firms that have struggled to survive in 2009 will emerge
strong in 2010, making that a year of recovery and renewal in the investment world.