Venture funding will be scarce

Johannesburg, 08 Dec 2008

Technology start-up companies looking for funding will have a hard time in 2009, as venture capital firms reduce investments, says an IDC report.

The report concludes: “The ongoing financial crisis presents serious challenges for venture capital firms and venture-backed technology start-ups. Tight capital markets are making it difficult for VCs to raise new funds and are forcing vendors to conserve capital. As a result, entrepreneurs can expect lower investment valuations and fewer acquisition opportunities in the months ahead.”

Richard Hurst, analyst at IDC, notes that this was to be expected. “The immediate reaction to new ventures in the current climate is to hunker down - when they should be jumping ahead and investing in innovation.”

Hurst believes funding will become increasingly scarce as venture companies become mindful of the economic situation and reluctance to invest in new companies grows.

“We remain very mindful of the landscape as we look ahead,” says Eben van Heerden, portfolio manager at HBD Venture Capital.

He emphasises that the reaction of venture capital companies will be to treat the current landscape as an eye-opener and as a means of interrogating things. Van Heerden notes though that venture capital companies will continue to give preference to sustainable companies which involve low risk.

Silver lining

Hurst notes that some sectors will be less affected than others. “There will still be a great deal of interest in the mobile and wireless area. Africa is a growing market for mobile technology and funding for it will continue. We will see a move towards virtualisation and a lot companies will go into outsourcing mode.”

Van Heerden has an optimistic view of the situation, saying: “We will jump back. A large part of the jump back is not going to take that long with the prospect for interest rate cuts, the CPI and other factors like that. South Africans are renowned for our ability to jump back.”