Venture firms are sounding the alarm over what this downturn might mean for their portfolio companies. While it’s true that great companies are built during downturns, it’s also true that plenty of entrepreneurs are going to be shut out of any sort of financing for the foreseeable future, as their personal wealth dwindles and banks decline to offer home equity loans or other lines of credit.
We’ve already reported on how the rest of this year is going to be a cautious time for venture and angel investors, but what does that mean for tech entrepreneurs? And how long, exactly, will VCs stay on the sidelines? As bad as things are forecast to be, my bet is they won’t be there for long.
For venture firms, this economic crisis looks a lot different from the nuclear winter they went through after 2001. From a high of $105 billion invested in all of 2000, investments by venture firms hit a low of $19.76 billion in 2003. Since that time, the growth has been slow and steady, so there’s not as far to fall — last year, the total came to $30.69 billion.
This time around, rather than putting tens of millions into startups whose basic business models would never enable them to reach profitability, venture firms have been, in most cases, investing in real businesses. Some, most likely the Web 2.0 businesses whose goal is to get eyeballs now and revenue later, will end up flopping, but even they haven’t raised as much as the dot-coms did. Also, having learned from the bubble, most VCs have been putting money into reserves so that it can be used for follow-on investments. That means they can keep funding their portfolio companies a bit longer than originally planned.
That’s the good news. But first venture firms have to…