Startups Face A Tough Investment Environment

The already slow IPO environment has ground to a halt. Still, VCs remain optimistic that tech startups with the right products could still thrive under tough economic conditions.
The already slow IPO market has ground to a halt. In the second quarter, for the first time in 30 years, there were no initial public offerings of venture-backed companies, according to PricewaterhouseCoopers. At a gathering of venture capitalists and startups in San Francisco last week, a partner with a Silicon Valley financial advisory firm said he wouldn't be surprised if there isn't a single tech company IPO the rest of this year.

Still, VCs remain optimistic that tech startups with the right products will not only survive but thrive under tough economic conditions, and that the funding pipeline will stay open. "It's business as usual in our shop," says Doug Renart, with Tandem Entrepreneurs, an investment firm that helps Web companies get started. "Our businesses are lean by definition, and we never banked on IPOs or mega-acquisitions."

With few exit options, VC-backed startups must get by longer on their own. "We're advising our companies to, within reason, conserve cash that they have," says Mitchell Kerztman, with Hummer Winblad Venture Partners. "If they're fundraising, we're suggesting that they raise a little more cash rather than a little less."

VC funds "absolutely" will be harder to land in the months ahead, says the partner of another Bay Area VC firm. In the process, he says, only the best ideas get through, resulting in fewer new companies but giving those that are funded a greater chance of success.

A slowing economy might even open some doors for startups. Virtualization, software-as-a-service, and cloud computing vendors are in a good position to ride out any downturn. Just last week, Hewlett-Packard bought venture-backed LeftHand Networks, a storage virtualization and SAN vendor, for $360 million. Given the pressures on IT budgets, CIOs will be more open to startups that can lower costs by reducing data center software and hardware.

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