The recent downturn of the American economy and credit crunch has affected much of the finance and investment industry – and venture capitalists have also been caught in the low tide.  Even though money is still being invested by venture capitalists, you should take note of potential policy changes that may influence your funding. 

 

Halted IPO Strategies

 

Initial public offerings on the stock markets came to a virtual standstill by the second quarter of 2008, and the fourth quarter did not witness a single venture-backed IPO.   In fact, according to the Dow Jones VentureSource and National Venture Capital Association polls, the number of IPOs decreased more than 90% between 2007 and 2008. 

 

With this in mind, many venture capital firms are looking more at startup businesses that do not have an IPO exit strategy, or those who will delay plans for an IPO.  Instead, they are investing more in firms that plan to remain a private business or corporation, or one with high acquisition and takeover potential.  

 

An IPO does not need to be discounted altogether.  Many startup companies have fared very well with a delayed IPO after a recession.  Google went public in 2004 after the economic recession that began in 2001.  The delay resulted in a big success for the search engine giant.

 

Lower Amounts Invested

 

VC firms are also tightening their individual lending budgets.  Rather than lending large amounts of dollars to fewer companies, many venture capital firms are reducing their maximum lending amounts and investing in a more diverse base of startups.  However, this trend means a potential VC fund recipient may expect to receive considerably less than they need or expected from a venture capital firm.  Entrepreneurs who wish to receive VC funding will have to either tighten their belts or search for additional funding elsewhere.

 

Higher Interest Rates

 

Be prepared to pay higher interest rates to venture capitalists due to the credit crunch.  The reduction of cash that banks can lend between themselves results in higher interest rates all around.  Investors who are part of venture capital firms will want a higher rate of return since the security of banks lending is reduced.  That translates into a higher payback to venture capitalists for funds invested in your business.

 

More Competition

 

Along with the credit crunch and the lesser amounts of bank loans, there will likely be a greater amount of competition for VC funding.  Bank loans are a staple of business financing.  Without this source of financing, many entrepreneurs will be vying for the attention of venture capitalists.  Be prepared to have a solid business plan and projected financials if you are looking for VC funding.

 

Entrepreneurs with great business ideas need not fret excessively about how they will obtain financing for their new business.  There still is venture capital money for quality ideas.  However, entrepreneurs will need to take additional care to prepare tighter budgets and start with potentially less capital than anticipated.   In order to reach the attention of venture capitalists through greater competition, entrepreneurs will need to prepare solid business plans that show growth and sustainability.

 

 

Tags: angel investor, angel investors, Find funding, startup funding, vc funding, venture capital funding, Venture Capitalist

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