How will the credit crisis affect the tech industry?

September 18, 2008 12:02 PM

How will the current credit crisis and bank failures affect the tech industry and particularly the availability and quality of venture capital?

I'm working for a tech startup, and as a geek many of my friends are doing the same. I've been carefully reading the analysis of the failures of Bear Sterns, AIG, Lehman, et al., and trying to work out how they're going to affect us, particular with regards to venture capital investments.

Last time we had an economic "incident", it ended with a (temporary) stoppage in venture capital availability, which led directly to many folks like me losing their jobs. This time, the economic instabilities aren't the tech industry's fault, but it seems the general drying up of the credit markets could have the same effect.

Has anyone been looking at the effect the mortgage/credit crisis is having on the tech industry and the venture capital system? Anyone have any predictions?

posted by jacobian to Work & Money (6 answers total)

VC doesn't usually come from banks, and in my opinion, there will always be rich dudes with money looking to get richer by investing in other people's work. I don't see that changing. How it will affect the tech market is that you will actually have to have a real idea with a real business plan, because the market is tanking and everyone will be more wary of their investments. Kind of like 2001 vs. now, times ten.
posted by fusinski at 12:17 PM on September 18, 2008

Speaking from the UK, seed and first-round investments across Europe were down in the last quarter but only down slightly from Q2, which had been the best period since before 9/11.

3i - Europe's largest VC firm - announced its intention to pull out of early-stage investment in tech startups back in February.

My advice, for what it's worth (and that's not much), is to play up your environmentally-friendly 'green' angle (if possible) and/or move the business to a country such as India where PE investment is still doing well.
posted by tapeguy at 12:41 PM on September 18, 2008

VC isn't going away. Guys who have VC money are smart enough to have money in a downturn and are in some ways more likely to strike in a down market (rather than an overcrowded one). However because the market is changing they are going to be looking for new ideas (not yet another social network Web 2.0) so they can be first into the eventual recovery, not the tail end of the downturn. And they are going to vet them more thoroughly since there is more uncertainty.

However if you're at an existing company looking for an angel investor or a bridge loan or something to tide you over until you hit-- That kind of money (essentially bailout money) is going away as people cut their losses.
posted by Ookseer at 1:17 PM on September 18, 2008

If you're in the U.S., I doubt the credit crisis and the bank failures will have much effect in the near term on the availability of VC for early stage companies. There's plenty of committed capital out there and, importantly, VCs (unlike private equity investors) don't use leverage in their investments. If the idea is good, they'll invest.

There will probably be an effect for later stage companies, since there won't be as many satisfactory exit opportunities (no IPOs, few good M&A deals) and business might be slower than initially forecast. Those companies might have to turn to their VCs to keep running, and the terms of those later stage raises would likely be a bit harsher than the companies' previous rounds.

If the crisis lasts for an extended period, such that VCs have allocated their current funds but can't raise new funds, or if a lot of LPs somehow end up unable or unwilling to meet their funding commitments, then there might be a problem.
posted by odin53 at 1:29 PM on September 18, 2008

An article in yesterday's Boston Globe discussed this very topic: High-tech start-ups brace for spending freeze after Wall St. woes.
posted by ericb at 1:36 PM on September 18, 2008

I'm working on a project that's probably going to require VC in the near future. According to the brains we're working with, VC won't vanish overnight for the reasons others have mentioned upthread. Angel funding may dry up quick-like, since individual private investors who felt the bite from the past few days of stock drops are probably circling their financial wagons.
posted by verb at 3:41 PM on September 18, 2008