Impact of Economic Downturn on VC and Angel Investor Confidence

NPR had a very interesting segment on March 20th.   It explored the impact of the looming recession and the dramatic meltdown of Bear Stearns on Venture Capital Firms behavior, specific to Silicon Valley.

Reportedly,  in 2007  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. As backward-looking figures, they reflect the confidence VCs had in 2007.   What is their level of confidence going forward?  

It will be natural, and prudent, for VCs to take a breath, reassess the forecasts of the companies they are intending to invest in, re-evaluate the sectors they are investing in.    As we saw in the recession following the dot-com bomb, some sectors weren’t as impacted as others.   Investments the VCs have made in green tech recently may need more nursing through the recession.  However, given one of the main things driving this recession is the rising oil prices, Clean-Green technology that solves a component of that problem won’t be impacted by this type of economic down turn.   Also keep in mind, the Venture Capital Firms have already raised their funds.   They need to put that money to work.   They will be prudent in their decisions about investments, but they have already become more prudent after the bomb.   We predict this will only represent a slight slow down for the venture capital community.  

Reported from the NPR Interview: “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.

On the Angel side of the equation, there has been a natural slow down during the 2nd quarter as these high net worth folks assess and see how the market responds.   With that said, the large private equity conference we participated in April in Atlanta ( ) was a huge success with 180 attendees and many of the 44 companies that participating reporting that they have either already received investment or in the process of completing due diligence to receive investment.   That would be an indicator that the private investors are somewhat above the fray of the economic turmoil and are still actively looking at good investment opportunities to increase their wealth.   After all, it is through the growth of early stage companies through the investment of private individuals that our economy grows.

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