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Venture Capitalism in 2008/2009 During the Economic Downturn

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.

Source

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