Wall Street's worries following the Bear Stearns meltdown are having a chilling effect on some Silicon Valley startup ventures as they search for capital to get off the ground. Experts say investor money hasn't completely dried up, but there's a definite drought.
Venture capitalists are the midwives of innovation in American business, especially in Silicon Valley, where they remain concentrated in high numbers. They plant and nurture startup companies, which are then bought by bigger companies or are offered to shareholders on the stock market. So, how is the economic downturn affecting capitalism's nursery?
Last year, venture capital investments in startup companies rose to a six-year high, to nearly $30 billion. That's the best year since the dot-com blowout back in 2001. Close to 4,000 deals were made, compared with 4,500 in 2001. Much of that money went into clean energy and biotech, as well as the Internet and related technologies. But those were backward-looking figures.
"What I'm tracking is actually what venture capitalists think is going to happen in the future," says Mark Cannice, who teaches entrepreneurship at the University of San Francisco and runs a quarterly confidence survey of Silicon Valley venture capitalists. The most recent one was in the first week of January.
"Confidence plunged to a four-year low by a significant amount," he says.
But all that venture money is still sitting there — so what do venture capitalists do when confidence in the future sinks?
More Time in the Nursery
Think of a venture startup as a state of incubation — a period that can last quite a few years before the company, if successful, is bought by a Google, a Microsoft or a similar big company. Or it might be bought by stock market investors in a public offering.
In an economic downturn, the startup has to be nursed for a longer period at a lower capital burn rate.
"There is a lot of money sitting out there, but then how do VCs behave in a down market is to conserve that money, to protect that money, to make sure that it's actually being spent properly and that we have enough money to live until the next boom," says David Epstein, a venture capitalist with Crosslink Capital.
The longer it takes to sell a startup to a big company or the public, the more money is required to keep it going and growing while waiting for better times. Venture capitalists don't just make one first-time investment; they nurse companies along until they are ready to sell. All of this means there could be less money available for new investments.
Looking Beyond the Gloomy Horizon
So, will the economic turndown stifle innovation in the creative caldron of Silicon Valley? Epstein doesn't think so.
"Entrepreneurs who are inside large companies, but their personality is more entrepreneurial and they see their company slowing down — that can spur them to say 'It's time for me to go out and start something on my own, because I am bored,' " he says.
But some areas that have experienced a recent boom may see a setback, according to Rob Enderle, a longtime consultant to technology companies in Silicon Valley.
"I think one of the areas that's going to suffer a bit is green initiatives, because typically when money's tight, folks have a little harder time investing in green unless its providing an economic return," Enderle says. "And right now, a lot of the green technologies are more feel-good technologies and really can't be justified on an economic basis."
At least in the short term. But a lot of venture capital looks toward a horizon beyond the current gloom and doom.