Venture Capitalists Wallets Feel the Strain Of A Slowdown In 1Q08

Implications: The Internet, Biotech and Cleantech are the sectors that benefited the most from venture capitals (VC) investments in 1Q08, despite a drop in VC investments to $7.1 billion in 1Q08. The economic slowdown has caused VC's to all but close their wallets to IPOs and M&As, which is the two most common avenues VC firms use to cash in on their investments. In an attempt to put a positive spin on the latest data, VC experts are saying that "investment activity still remains relatively high compared to the last economic slowdown in 2001." Seed/startup financing totaled $1.64 billion during 1Q08, however, its down from the $2.24 billion in seed/startup deals from 4Q07. VC's invested over $29 billion in total deals in 2007, which marked the highest yearly investment total since 2001. As in 1Q08, 2007 record investment levels by VCs were in the "Cleantech, Biotech and Internet specific companies, however, in 1Q08, VC's pulled back a bit as they too fell the strain of an economic slowdown.

Analysis: In 2007, venture capitalists investments is projected to succeed $27 billion, however, 1Q08 saw a decline in VC investments, which is down to $7.1 billion in 1Q08 from $7.5 billion in 1Q07. The "Cleantech" sector is expected to attract the highest levels of VC financing in 2008 and in 1Q08 VCs invested over $625 million in the sector. The Biotech and software sectors accounted for the largest share of venture capital funding in 1Q08. Media, entertainment, medical devices and wireless telecoms are other sectors VCs will pour funding into in 2008, and the IPO market may experience some recovery, while M&A activity may see a lift before year-end.

1.  The U.S. economic slowdown has put a strain on VCs wallets and could hinder their ability to raise capital to fund seed/startups, expansions, developments and late stage companies seeking venture capital to grow in 2008

2.  Valuations on startups could be lower as the economy slows down and IPO startups may decline, as well as M&A activity at larger corporations, however,  Biotech, Cleantech and Internet specific companies are projected to receive the "lion's share" of venture capital funding in 2008

Takeaway:  2007 was a good year to be an entrepreneur as venture capitalists poured more capital into seed/startup companies than any other category. Later stage companies also fared well in 2007, however, 1Q08 is getting off to a slower start than in 2007. Silicon Valley is still the dominant geographic region for VC investments, followed by New England and the Southeast. In 2008, VCs may look abroad to global markets to diversify their portfolio holdings and look at markets where tech startups could see VCs putting up seed capital over the next 18-24 months to fund what could turn out to be the next great investment.