The top 20 venture firms in the industry are well-funded and can go through 2009 or 2010 without a liquidity event – in which a company they’ve invested in either is acquired or goes public and the VC firm gets a return on its investment – but for smaller firms, “it’s a no man’s land,” said Matt Murphy, a partner at the VC firm Kleiner Perkins, one of the panelists at an event hosted by the Churchill Club March 16 in Palo Alto, Calif.
Some VC firms were fortunate to have raised significant new money from their limited partners in 2007 and 2008 and are well-positioned to ride out the downturn, Murphy noted. But smaller firms run the risk that limited partners may default on their commitments to invest in VC firms and there may be some consolidation among those smaller firms.
And because of the recession, some startups dependent on VC money could suffer, too, Murphy added, finding it harder to raise VC funds, or receiving new funding in “down rounds,” in which the valuation of the company is reduced from where it was in the previous round.
Great Time to Start a Company
But for startup companies with a good business plan looking for funding, “now is a great time to start a company,” said Reid Hoffman, chairman and CEO of the social networking site LinkedIn and an angel investor in many companies. Given rising unemployment, there is a vast talent pool to recruit from and some companies, like Web-based ones, can be launched with little capital expense.
Investments that Hoffman makes in startups usually take as long as seven years to reach liquidity, so those companies “have a longer runway” to grow, despite the recession.
IPO Market Gone
However, one liquidity option has been shut off for now, the initial public offering (IPO) of stock – “going public” – the panelists agreed. Only five technology companies went public in 2008, versus 368 in 1999, at the height of the dot-com boom, according to the report IPO Factoids, 2008.
Growth Industries
Still, the panelists also agreed that there are several industry sectors where VC investments can pay off, regardless of the IPO market or the dismal state of the economy:
- Green technology
- Clean energy
- Life sciences
- Web-based businesses, such as those in social networking
- Software applications running on mobile devices
- Companies that offer targeted Web advertising tools
- Anyone pursuing the China market.
The current recession is serious, but it feels different to Silicon Valley VCs compared to the last one in 2001, noted Jay Hoag, co-founder of Technology Crossover Ventures. The current recession is global and started in the financial services and housing sectors, but the 2001 recession started with the bursting of the dot-com bubble, making a direct hit on Silicon Valley.
“[The current recession] seems more like being sideswiped by a tractor-trailer than run over by one,” Hoag said.
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