VC Activity for Tech Firms Drying Up? UserPageVisits:115 active 80 80 DaniWeb 561 60 2008-10-07T23:07:34+00:00

VC Activity for Tech Firms Drying Up?


The stock market seem to be stabilizing, aided by news that the Federal Reserve will buy up short-term debt in order to get companies financially interacting again. I won't get into the gruesome details, but buying up short term debt (known as commercial paper on Wall Street - a mechanism that enables companies to borrow money overnight or or over the course of a few days) is an area that the Federal Reserve rarely gets into.

Of course, these are historic times and the Fed will every tool in its arsenal to reverse the sliding economy. That's what we're seeing here - and it seems to be generating a positive reaction among investors.

On the tech side, another byproduct of the U.S. credit crunch is a virtual halt to venture capital activity. Dow Jones VentureSource reported that in the third quarter of 2008 venture capital activity was off 66% from the same period in 2007. It's worth mentioning that 2007 wasn't a great year for VC activity, either.

Historically, in the tech sector, venture capital money is used to fuel Initial Public Offerings - "IPO's" in Wall Street lingo - which provides firms with much-needed capital to grow their businesses.

Just how bad is the VC market for tech firms? Jessica Canning, global research director for VentureSource, told Forbes last week that it as the "worst IPO market we've ever seen."

Consequently, there is very little money out there for tech firms to expand research and development, hire new staffers, buy new equipment, and execute much-needed marketing campaigns. According to Forbes, only one tech firm went public in Q3 - San Antionio-based Rackspace Hosting - and that only netted the firm $157 million, which is considered chump change to a lot of venture capitalist types.

Says Forbes, "The results from the third quarter put 2008 on pace to be the year with the least number of mergers and acquisitions in a decade. Initial public offerings have also been notably scarce this year: only seven venture backed companies have gone public so far in 2008, raising $551 million. By contrast, last year companies that venture capitalists helped launch hauled in $34 billion from 86 public offerings and 304 acquisitions. Such poor returns mean that venture capitalists and their investors, who have already been tentative about funding new deals in 2008, will become more skittish."

One potential hang-up comes, as usual, from Washington, where Congress can't get its act together and approve the continuation of a $9.8 research and development tax credit that is especially helpful to small ad mid-size technology companies. According to the Alliant Group, a tax advisor to businesses, over 16,000 companies have taken advantage of the tax credit to ramp up their R&D efforts in the past 10 years. With Congress squabbling over the future of the tax (Obama is against it and McCain is for it) small and mid-sized firms are "seething" according to Forbes.

Says Dean Zerbe, national managing director for the AlliantGroup, "This couldn't come at a worse time. We're writing a $700 billion check to Wall Street, and there's a fight over whether we should offset a few billion to the business community that's creating innovation."

That's the typical fiddling-while-Rome-is-burning behavior we've come to expect from Congress. But make no mistake, the lack of the tax credit, and the downward trend in VC capital, is making life tough enough for tech firms as 2008 begins to draw to a (merciful) close.

About the Author
Be a part of the DaniWeb community

We're a friendly, industry-focused community of 1.19 million developers, IT pros, digital marketers, and technology enthusiasts learning and sharing knowledge.