Finance Fallout to Stifle Tech Investments, Say VCs

Ann All

As recently as last spring, some pundits insisted that more technology startups would begin making initial public offerings (IPOs) of stock, widely perceived as a sign of financial stability.

 

That isn't how it's played out, however. Instead there haven't been any venture-backed IPOs in 2008, the biggest dearth in three decades. Calling it a "crisis," members of the National Venture Capital Association (NVCA) in July blamed nervous investors, the credit crunch and Sarbanes-Oxley as the top three contributors to the problem.

 

And that was before the double whammy of a Lehman Bros. bankruptcy and Merrill Lynch sellout to Bank of America roiled the market on Monday. That sent the Dow Jones industrial average on a 500-point slide, the biggest drop since the Sept. 11, 2001, terrorist attacks. The tech-heavy Nasdaq composite index fell 80 points.

 

While mergers and acquisitions have held fairly steady in the tech sector, that will likely change going forward, several experts tell CNET News. The loss of two well-known investment banks will just make it harder for tech companies to close deals. Says Mark Heesen, NVCA president:

An oligopoly is not the best thing for the American capital system. When you have so few investment firms out there, it makes it difficult to get a deal at the end of the day.

Early stage venture deals shouldn't suffer initially, thanks to deep-pocketed growth-industry investors, Heesen says, although later-stage financing or mid-cap buyouts may be squelched. Eventually, as companies find it harder to go public or be acquired, venture capitalists may have to defer dollars from promising startups to later-stage companies in need of cash infusions. Even large and cash-rich tech companies might put acquisitions on hold as their own stock prices dip and worries grow over their financial performance.

 


Why should we worry about tech startups, many of whom (dude!) seemingly struggle to write a basic business plan and provide reliable products and services? Says Emily Mendell, the NCVA's vice president of strategic affairs:

What would have happened if Dell or Google or Amazon or eBay didn't go public? Think of all the jobs that would have been lost. From an economic standpoint, we'd like to see many more IPOs and fewer acquisitions.

The NCVA is hoping that smaller boutique investment companies such as Piper or Jeffries will take up some of the investment slack. Perhaps Google, which is reportedly establishing its own venture capital arm, can help? It seemingly harbors aspirations to do everything else, including saving the planet

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