Since the slump of the economy starting in late 2007, companies funded by venture capital firms also have seen a decline in the number of initial public offerings.  Stock investors are simply not putting money into new companies, but 2010 may see a return of new IPOs from venture capital-backed companies.

During a recession, skittish stock investors tend to act conservatively with their money, selling stock to put funds into more safe investments that will help retain value, such as gold or government issued securities. Putting money into a new, untested stock company is just another risk that investors are not willing to take.

What 2010 Will Bring

However, according to a recent article from the Wall Street Journal, 2010 looks promising for newer, small company valuations. In fact, the end of 2009 showed a more fair valuation in stock prices than over the last two years.

What does that mean for stock investors?  Stocks are realizing a more accurate valuation, which means that investors are placing their trust and funds back into equities.  Thus, with a higher risk tolerance this year, stock investors may be more attracted to buying stock in new VC-backed IPOs, especially since IPO stocks are typically discounted as a compensation for investor risk.

In addition, venture-backed companies who issue an IPO are typically considered small or mid-cap investments. There is a wide range of investors who do want to invest in these types of stock categories, including mutual funds and larger corporate investors like insurance companies. Small to mid cap venture-backed companies will be of interest to them as they seek to increase the value of their stock portfolios in 2010.

The Growth in IPOs This Year

Just how many new venture capital-backed IPOs could we see in 2010? 2009 saw only 8 such IPOs, according to information from Dow Jones VentureSource. But according to the WSJ article, one expert projects 30 to 50 new IPOs could happen this year. In fact, the Dow Jones VentureSource already has 33 venture capital-backed IPOs filed with the SEC.

So far in 2010 no venture capital-backed companies have made an IPO showing. However, if the data is correct, 2010 could actually see the return of the IPO for venture capital investment companies.

How has the economy affected venture capital new business funding? According to a report released in January 2010, the state of venture capital is in a deep freeze. The study and report was issued by Thomson Reuters and the National Venture Capital Association (NVCA), and it noted that the total amount of venture capital funding was at its lowest rate in 5 years.

The Reality of 2009

The report shows that investors are becoming less interested in funding new venture capital deals. VC firms raised a total of only $15.2 billion from 120 funds in 2009, down 47% from $28.5 billion from 223 funds raised in 2008.  This was down 58% from 2007 when a total of $36.1 billion was raised from 250 funds for venture capital.

In terms of actual investments made by private investors such as venture capitalists, in 2009, only 2,795 deals were made, with a total business funding of $17.6 billion. Compared to 2008, that number is down 37% when 3.985 deals were made for a total investment of $27.9 billion.

Why Venture Capital Shriveled in 2009

Why has the number of venture capital deals spiraled downward? The economy is a major concern, and investors have certainly reduced their risk tolerance levels. New businesses, despite whether they have a great idea and top-notch management team, are slated to fail with dwindling markets. While few venture capital firms did invest in new businesses in 2009, many voluntarily stayed out of obtaining new investments completely.

Looking to the Future

However, the outlook is promising. According to Mark Heesen, president of the NVCA, “most of these firms will not be afforded the luxury of continuing to wait for market conditions to improve in 2010.” Heesen goes on to project that 2010 “promises to be a defining period as we will gain a better sense as to what the venture capital industry will resemble in the next decade. All signs point to a leaner, more capital efficient asset class comprised of firms with proven track records of delivering value to limited partners. Not all firms will make that cut, but the ones that do will be very well positioned to invest.”

And according to a poll of venture capitalists about the outlook for 2010, the respondents said they expect to see gradual increases in the total amount of investment levels. Areas of expected increase are in “green” technology companies, as well as more venture capital investment in growth companies and later stage companies.

2009 saw a severe drop in the total number of new small businesses funded by venture capital firms. While total small business funding is down, 2010 looks to bring in more investment opportunities for VC firms in a few select areas. One of those sectors is clean technology.

The Profile of VC Funding Today

According to a report published by MoneyTree from PricewaterhouseCoopers, LLC and the National Venture Capital Association (NVCA), the 3^rd quarter of 2009 saw an increase in venture capital funding driven by the clean technology sector. One of the clean tech deals was the ninth largest venture capital deal since 1995.

Not only is clean technology getting more deals, but they are receiving business funding over the long-haul. Mark Heeson, president of the NVCA says that this type of funding is “a gradual and deliberate industry shift towards a longer term venture capital investment strategy.”

This tells us that venture capital companies are looking more toward sectors like clean technology, biotechnology and life sciences, where business funding occurs over an extended period, sometimes 10 to 12 years. These companies often have multiple rounds of venture capital financing over that time period, and they have a longer average time to accomplish its exit strategy.

This is not to say that shorter-term small business investment opportunities will be overlooked. Heesen goes on to say that the mix of sectors that VC firms invest in will become more balanced between shorter-term IT companies, as well as longer-term bio- and clean technology companies.

The Promise of Clean Tech

Clean technology includes companies that specialize in alternative and renewable energy sources, pollution and recycling, power supplies, conservation, and green transportation. These types of companies are founded to produce more energy efficient methods of producing and using electricity, as well as create fuels and electricity with fewer carbon footprints.

Clean technology is seeing an increase in the number of firms due to a variety of reasons. One is the simple fact that most people are interested in clean fuel technology and methods that help save the planet, thus creating a market for these products. Second, the U.S. government also is encouraging clean technology, with tax incentives and guaranteed loans for clean technology companies.

Clean technology is still emerging and is at a young stage. With the help of government backed financial aid and increased business funding from venture capital firms, clean technology may become the most sought-after VC investments.