VCs Open Up on Economic Trends

Despite recent funding deals for storage startups such as DataCore and Storwize, the overall investment landscape is less than rosy, warn VCs and analysts.

In a recently released survey of 201 venture capitalists undertaken jointly by KPMG and VC networking site AlwaysOn, almost three quarters of respondents said that the U.S. is in a recession, predicting that the unstable economy will take its toll on funding activity in the coming year.

Further, although some $30 billion worth of venture funding was invested in the U.S. last year, around half of the VCs surveyed expect this figure to fall in 2008.

Given the state of the economy, venture capitalists are signaling some caution in terms of their investment approach,” wrote Brian Hughes, co-leader of KPMG’s venture capital practice, in a statement.

Bright spots

Hughes added that it is not necessarily all doom and gloom, though: “[VCs] are indicating that though overall investment may decrease, there will still be demand for investments in certain geographies and industry sectors.”This could bode well for storage startups, as recent fundings have shown. Green IT is also favored: According to the KPMG study, “greentech” was cited by almost 70 percent of respondents as the largest potential consumer of VC funds, followed by Internet services and biotechnology.

Even in these emerging sectors, clinching the necessary funds will be easier said than done, and more than half of respondents warned that obtaining seed money will be increasingly challenging for entrepreneurs.

The VC slowdown was also identified in a report released this week by the National Venture Capital Association (NVCA) and PriceWaterhouseCoopers.

That report shows that although venture capitalists invested $7.1 billion in 922 deals across all sectors in the first quarter of 2008, this was almost 10 percent down on the previous quarter, when $7.8 billion was invested in 1,045 deals.

The NVCA report also identified green technology and life sciences as key investment areas for VCs, and painted a slightly rosier picture than KPMG.”We do not expect to see significant declines in investment levels in the coming year,” said NVCA president Mark Heesen, in a statement. “However, the dollars going to later stage investments could increase if the IPO window remains closed and venture capitalists could have to sustain companies longer than expected.”

IPO? No!

The KPMG and AlwaysOn survey also identified a hiatus in public offerings. Some 87 percent of the VCs interviewed by KPMG predicted a decrease in public offerings, with 46 percent expecting lower valuations.

This certainly reflects current trends in the storage market, where the last public offering was 3PAR’s $95 million IPO last November .

The first four months of 2008 have been deathly quiet on the storage IPO front, compared to the first few months of 2007, when there were two storage-related offerings.

There's little sign of any pickup, although MAID specialist Nexsan filed its S-1 last week, outlining plans to raise $80.5 million in a public offering.Nexsan's filing represents something of a bold move at a time when most storage vendors are waiting for the economy to improve before pushing ahead with their IPO plans.

Clustered NAS specialist ONStor, for example, recently clinched $25 million in funding after deciding that the financial markets were not conducive to a public offering, and GlassHouse Technologies and BlueArc have both been quiet about their own S-1 filings.

”The IPO climate for any company right now is at a multi-year low -- it’s very difficult for any company, no matter what sector, to become public,” says Scott Sweet, senior managing partner of analyst firm IPOBoutique.

Hollywood special effects company Digital Domain, for example, was forced to postpone its IPO this week, according to reports.

“A technology deal now must show increasing top-line growth as well as decreasing bottom-line losses,” adds Sweet. “I am not just talking minor decreases; I mean major decreases in losses, preferably a company that is showing profits.”Have a comment on this story? Please click "Discuss" below. If you'd like to contact Byte and Switch's editors directly, send us a message.