The US financial sector meltdown is a mixed blessing for technology startups, making them seem solid bets in a shaky market, but threatening long waits for investors accustomed to quick returns.
Coffers of venture capitalists are brimming with cash, but those managing investments are increasingly wary of which startups they back, US National Venture Capital Association president Mark Heeson said.
The reason is that early investors reap rewards when young companies go public with stock or get bought by corporate giants; and the “IPOs and acquisitions” market has tanked along with the US economy.
Heeson said a host of venture capital (VC) firms he met with earlier this month in Silicon Valley “are very concerned about the exit market and are doing fewer deals because they can only shepherd so many companies.”
Only six venture capital-backed startups have gone public so far this year as compared with 70 initial public offerings (IPOs) taking place by this time in a typical year, Heeson said.
Young tech firms polled by AFP say that investment money wells aren’t drying up, but they are certainly being walled off.
“Venture capitalists have tightened their focus,” said Tarchia chief executive Jason Stevens, who started a Silicon Valley computer cooling device company with Russian seed money and is hunting for investors.
“It used to be you could contact a VC even remotely involved in tech and they would chat with you. As this crisis has unfolded, I am not getting even a foot in the door of anyone but specialists,” he said.
While it is an abysmal time to be a neophyte entrepreneur pitching venture capitalists or to be seeking funding for startups without clear plans for earning money, there is still cash available for promising startups.
“It is easy to cry ‘Woe is me’ but are these in fact viable startups?” asked entrepreneur Adeo Ressi, who created thefunded.com Web site, which is devoted to startups seeking venture capital.
“I know of a whole bunch of companies that are closing investments right now,” he said.
Despite the financial mess, this year is shaping up to be a typical year, in which about 3,000 startups get VC funding out of about 9,000 hunting for backing, Ressi said on Friday.
“For every one guy who can get money, you can find two who don’t and you could find that 10 years ago too,” Ressi said. “Decisions are being made and companies are getting funded.”
Market turmoil is also giving startups “enormous opportunities” as prices for commercial real estate plummet and talented workers laid off from major firms look for new jobs.
“A lot of startups are going to be picking these people up as quickly as possible,” Ressi said.
Putting money into startups has also become a comparatively safe and smart bet in the context of a market in which traditional investments have lost value.
“Investing in venture capital is a smart move in this environment,” Ressi said. “They have long-term horizons and the risk profile, while high, is not that bad right now, when you compare it to equity and debt. I predict there will be an influx of cash to invest.”
Since investors in startups don’t expect to see their returns for several years, the willingness of venture capitalists to put their money on the line depends on how long they believe it will take for the market to recover.
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