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Where Venture Capitalism is Heading in 2009-2010
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Just as today’s down economy has changed the way in which angel investors conduct their business dealings, venture capitalists have also taken prudent steps to ensure that their investments survive. The recession has clearly affected the manner and pace in which VC investments are made, and there is no doubt that a sluggish economy will bring with it rather bleak investing as well.

According to a recent prediction survey conducted by the National Venture Capital Association (NVCA), 2009 will be a slow year for venture investments. Of the 400 US venture capitalists participating in the study, 92 percent predict that investments will drop by 10% or more. This will more than likely produce an annual figure of roughly 27 billion dollars, down from 30 billion the previous year.

As a result, young, innovative companies will be hit hard, as VCs provide more monetary support towards existing investments and companies. This trend can be considered an extremely wise move on behalf of VCs; since they invest large amounts of other people’s money, they cannot afford to take the risk of supporting early stage companies/startups which have not established financial stability. Many believe that investing in novel products and technologies is too risky a move in today’s down economy.

In addition to the fund raising difficulties for VC investors and entrepreneurs, VC exits have also struggled. Given the current economic circumstances, VCs are preparing their portfolio companies for these tough times. Expansion projects have been delayed, voluntary pay cuts and layoffs have been considered, and restricted company spending is now at an all time high. These efforts have been made to ensure survival and prosperity of VC backed firms.

But when VCs do decide to invest, they will most likely stick to market sectors with a proven history of success, such as clean fuel and biotechnology. On the other hand, media and semiconductor markets will more likely experience a decline. Such a downturn will not only affect the US but will have global implications as well, with Europe being particularly hit hard by the current economy.

The upside of the down economy is that it opens prospects to obtain great deals. In fact, some VCs feel that the best time to invest is during a struggling market, when both valuations and competition is at an all time low.

Mark Heeson, the president of the NVCA, forecasts that 2009 will be a year of “Darwinian change.” Companies and venture capital firms that have struggled to survive in 2009 will emerge strong in 2010, making that a year of recovery and renewal in the investment world.

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