Entrepreneurs need to shift focus or find alternative sources of funding

By Matthew Bandyk

Entrepreneurs still remember the dot-com crash that rocked the world economy almost a decade ago. Now there’s something else to worry about: A slow deflation of investment. Industry watchers say today they’re seeing the weakest market for venture capital in decades.

The main sign of distress is the complete lack of venture capital-funded companies going public. According to a July report by the National Venture Capital Association, there were no VC-backed IPOs in the second quarter of 2008. The last time that happened was in 1978.

Going public might seem like a far-off issue for the entrepreneur who is just getting his or her start-up off the ground. But the lack of IPOs might be one symptom of a greater disease slowing down VC activity. Venture capitalists appear to be feeling the pressure from credit problems in the economy that have led investing to crumble. Mark Cannice, a professor of entrepreneurship at the University of San Francisco, writes a quarterly Silicon Valley Venture Capital Confidence Index based on an ongoing survey. The past three quarters have each set new lows for the level of confidence among Silicon Valley venture capitalists since the index began in 2004.

Going public is not the only measure of health in the VC industry. There is also the question of how many deals are being made in terms of buying and selling start-up companies. Here, anecdotal evidence suggests the lack of confidence translates to less activity. “Deals are being done. But there are fewer being done,” says Mark Heesen, president of the NVCA.

The biggest losers in that process of elimination might be the entrepreneurs who need venture capital funding the most. It’s always been hard to get. But now, the system is even more competitive. “The truth of the matter is that those who do get the money are truly the gazelles of the U.S. economy,” says Heesen. Those gazelles tend to be the most experienced and are not always the little guys with big ideas. “There are not as many high-growth opportunities for start-up companies. The good opportunities end up going to the name-brand capitalists,” says Vinit Nijhawan, an entrepreneur and venture capitalist who chairs The Indus Entrepreneurs group in Boston.

Part of the reason it’s going more competitive is that less confidence among VCs means more conservatism on their part. That means the more inexperienced the entrepreneur and the more the start-up is in its infancy, the less chance that entrepreneur can get funding. “For early stage investing, things are very difficult. If you’re a guy who has never got venture capital before, it’s going to be tough,” says Nijhawan.

But even if venture capital activity is declining, that doesn’t mean there aren’t opportunities. Depending on the type of their start-ups, some entrepreneurs could find it easier to seek venture capital. “The pie hasn’t gotten bigger, but the size of the slicing is getting different,” says Heesen. One of those slices that appears to be getting bigger is for firms that specialize in developing clean and green technology. Global venture funding for clean technology firms reached an all-time high of $2 billion from April to June, according to a July 8 study from the Cleantech Group, a San Francisco research firm. That’s a 58 percent increase from the amount of funding the study had previously found in April to June of 2007.

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