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December 18, 2008

Tech VC seed money scarce in 2009

Semiconductor, digital media and wireless communications sectors to be the worst hit

By Jason Stamper

Venture capitalists are expecting the worse next year, with 96% of VC firms believing they will not be able to raise money for new investments in 2009.

Venture capital firms predict they will invest 10% less in 2009 than the year-ago period when an estimated $29 billion was invested, according to data just released in an annual survey of 400 venture capitalists by the National Venture Capital Association.

Start-up companies in green industries stand the best chance of getting venture capital funding the study has found.

But three-quarters of VC firms reported that foreign investments in Europe would drop, while 56% expect investments in Israel and India will fall.

IT start-ups will be particularly hard hit with investments and seed capital levels in semiconductor companies, digital media and the wireless communications sector expected to be well down on previous years.

NVCA president Mark Heesen attributed this to a lack of any ‘new wow technology that will revolutionise the IT category’.

Venture capital investments have been on the upswing since 2003, but the industry does not expect the market for initial public offerings (IPOs) will open again until 2010.

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This year’s Deloitte IPO Report has revealed activity has dived in the past 12 months, with just 75 IPOs expected to list during 2008, which would be down by more than 70% on the year-ago period.

Rackspace Hosting counts as the only venture-backed technology company to have gone public in the past nine months.

The NVCA takes the line that the best start-ups will survive and emerge stronger when the economy picks up again, something Heesen describes as ‘a period of Darwinian change’.

“The recession and shuttered IPO market will place tremendous pressure on portfolio companies to tighten their belts and re-tool where necessary,’’ he said. Most venture capitalists view that a down market is the best time to invest when valuations and competition are lower. There is no recession on innovation and great ideas will still get funded.

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