2009 may go down as the year of more, not less, venture capital financing.
Here’s what could happen …
Traditional VC firms will be investing less. They will all be under pressure from their LPs to either make the find size smaller or at least not aggressively draw down their capital. And, given the comparables in the public markets, valuations will decrease.
That said, their might be a lot of new actors in the venture capital world — especially in the growth stage (C rounds) of $10+ MM. Here we might see many mid-market private equity firms come down the food chain and compete with more traditional venture capital firms. These private equity firms — while also facing similar capital constraints as the VCs — won’t be able to do many deals they traditionally do because leverage is gone (they will not be able to borrow). So they might start looking for deals without leverage — and might start looking to invest in start-ups. Venture capital is essentially a no-leverage business.
Of course, given the mind-set of these larger private equity firms, they’ll likely be focusing on companies that are already proven and so the cream of the crop companies might actually have stratospheric valuations in 2009 (that have no reflection on the bear market) while we might see valuations of other companies wither.
that same logic could apply all the way down the food chain…with traditional VC firms focusing more on early/seed-stage and diversifying portfolio, also giving top tier early stage cos (with proven team, product) higher valuations.
essentially in any environment, particularly now – the cream rises to the top.
Blackstone group has set up local offices in Silicon Valley with a 4-man operation for exactly this purpose, from what I understand.