Richard Irving, a partner at venture capital firm Pond Venture Partners, considers the impact of economic slowdowns, both in terms of VC investment and the prospects for employment.
Recently, we finally had confirmation of what most of us have known for a while: the US economy is in a downturn.
The credit crisis is clearly the cause, and we have not hit bottom yet, but how will this slowdown affect those of us involved in technology?
Let's start with venture capital. While I have heard from some venture capitalists that they intend to sit on the sidelines for a while, this is unlikely to result in a major funding slowdown unless the environment deteriorates significantly further.
One reason is that good deals are always hard to find, and any VC I know will jump on such an opportunity regardless of the economy.
But while the definition of a good early-stage deal has not changed, later stage opportunities with ramping revenues will be scrutinized much more closely - should investors factor down revenues by the usual 50% or so, or assume a more aggressive discount?
That and the poor state of the IPO market will put pressure on late-stage valuations. But as always, companies with good momentum will still shine, still get bought and still go public.
Harder to call is the technology employment picture. Slower or negative growth almost always means that larger companies shed jobs. Historically larger companies produce negative employment growth over the long term, shedding more jobs than they create. The cuts almost always happen in a downturn.
Looking at all the downside earnings warnings is a clear herald of further layoffs. But startup and small company job growth is often resilient, with many small companies growing even in a recession, especially when they target high-growth emerging markets.
So my conclusion as a VC is to keep investing despite the downturn, and my advice if you work for a high-tech company is that you're safer right now in a start-up.
Recession is always a time, where your instincts and confidence in your investment are tested. While the big companies have riped the fruits during the better side of the economy, they prefer to lax during this time to avoid any setbacks. For the startups, its just about growing as they haven't seen the best yet.