US financial meltdown tests patience of tech startup investors

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, according to US National Venture Capital Association president Mark Heeson.

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 told AFP that a host of venture capital (VC) firms he met with last week 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 to 70 IPOs (initial public offerings) taking place by this time in a typical year, according to Heeson.

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."

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 website devoted to startups seeking venture capital.

"I know of a whole bunch of companies that are closing investments right now."

Despite the financial mess, 2008 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 told AFP on Friday.

"For every one guy who can get money you can find two who don't, and you could find that ten 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 are out looking for new jobs.

"It is pretty clear that a lot of startups are going to be picking these people up as quickly as possible," Ressi said.

And, putting money into startups has become a comparatively safer and smarter bet in the context of a market in which traditional, lower-risk investments have tanked in 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.

Winfred Shaw, a founder of Resonant Life Science Partners consulting firm that works with startups and venture capitalists, warns there could be a "lag effect" caused by the "cold exit market" for investors.

"With deteriorating exit markets the returns might not be as attractive," Shaw said.

"If things continue to get worse it will make limited partners reluctant to consider investing new funds. Right now, tech startups are as able as ever to get funding."

Alexander Muse of Architel.com has seen the velocity of funding deals in Northern Texas jump in the past 90 days, with the biggest effect of the financial crisis being tightened short term debt standards.

"VC money will never dry up - it's just a little harder to get right now," said Brady Brim-DeForest, the entrepreneur chief executive of Human Global Media.

"Yes, the economic situation makes everyone think a bit harder about where they put their money, but the good startups are still getting funded."

© 2008 AFP

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