Tech startups not doomed by recession


As Gordon Brown and the other world leaders attach jump leads to a stalled global economy, spare a thought for those businesses that haven't even got off the ground yet.

Clearly investment funds still exist, with newbies Twitter and IMVU snagging $35 million and $10 million of venture capital respectively. But what of those start-ups taking their very first baby steps in such a harsh economic environment? Is this the worst time to have a great tech idea?

"Innovation doesn't stop in a downturn so there is still investment," says Nigel Eccles, chief executive of Scottish internet startup "But it's definitely at a lower level than last year and it's just generally more challenging to raise money is what we've found personally."

"There is not an abundance of capital," agrees Bernard Dalle, a London-based partner at Index Ventures, who focuses on enterprise investments. "There's probably going to be less capital in the next two years than there was in the past five years."

Wary investors

That lack of funds is understandable given the tumbling markets, but investors are still out there. Index Ventures itself raised 350 million recently for a 10-year fund to nurture new technology companies. Naturally, money men are a little more cautious than they were at this same time last year.

"In this environment if you're going to take a risk with money then you want to be even more sure than you were before that it's worth it," says Laurence John, chief executive of the seed fund at venture capital firm Amadeus. "So you're either reducing risk for the same price or you're reducing price for the same risk or you're looking for more upside - those businesses that are riskier and come with a price but could be really big."

John is adamant that the money is still there in venture funds, but says there's less of it around because falling revenues in a recession mean existing investments need a longer gestation period.

"We're not really doing new deals, because we're having to put more into our current deals," John admits.

"Something's got to feed these companies a bit longer than VCs had banked on because those other sources of money have gone away. When other people turn up asking for money the first answer is, hang on a bit, we just have to check we have enough for our current companies.

According to Hubdub's Eccles, things aren't as bad for tech startups this time around because it wasn't a collapse in the technology market that caused the downturn. "The big difference between this time and the 2000/2001 downturn is that I think we hit bottom from a startup point of view much quicker this time," Eccles suggests.