Recession - Silicon Valley

Silicon Valley: down but not out?

The co-owner of Sherwood Partners makes his living by helping the financial backers of start-up firms that fail file for bankruptcy and wind down their operations. This year, he's helped shut down 30 firms -- more than the total number in 2008.

"Business is booming. It's exploding," Pichinson told Reuters from his Silicon Valley offices. "It's sad," he added.

Venture capitalists and market experts expect the pace of firms that shutdown in the tech industry to accelerate this year, potentially rivaling the dot-com crash, as funding dries up. Mergers, acquisitions and IPOs are no longer a reliable exit strategy with capital markets tanking and buyers wary.

So as in 2000, investors are now putting pressure on their invested firms, forcing them to cut back and save, or just cashing out and cutting their losses. Others say they are hunkering down and awaiting a turnaround and a resumption in deal and IPO activity in 12 to 18 months.

Paul Deninger, vice chairman of investment bank Jefferies & Co. in Boston, reckons that about a 10th of the 500 to 1,000 start-ups his institution now tracks nationwide will fail.

"The mergers and acquisitions market is firing on four out of eight cylinders," said Deninger, who runs a team that advises on deals. "Are we in a recession or depression? If 18 months from now we're in the same situation as today, then we have a much more serious problem."

To entice investment from a shrinking cash pool, startups now have to come up with fully realized business strategies.

Next week, many of Silicon Valley's venture capitalists and chief executives gather near Palm Springs for Demo.Com, a conference showing off undeveloped new products and technology. But unlike in years past, organizers expect many products will be tied to fleshed out business plans and market strategies.

"Companies will present a solid business proposition with a clear path to revenues," promised Chris Shipley, Demo's producer.

Last year, many of the start-ups there hoped to "collect a lot of customers and then figure out how to create business value around them. That's not working in the market today."

Silicon Valley got a wake-up call in October, when a private slide-presentation put together by well-known VC Sequoia somehow got leaked onto the Internet.

Entitled "RIP Good Times", it forced an already-nervous industry to mull over declarations like "it is different this time," and "recovery will be long," and "spend every dollar as if it were your last."

Venture capital funding tanked 71 percent in the fourth quarter of 2008, but investment hasn't completely vanished.

This week alone, Apparent Networks Inc of Massachusetts, which designs software to help firms access networks, raised $12 million from venture firms. Aveksa Inc, which tailor-makes security software for corporations, secured $10 million. And private equity investor Good Energies invested $20 million in SAGE Electrochromics Inc., a 20 year-old firm that makes glass-coverings to cut heating and lighting costs.

But investors are getting pickier, scrutinizing every firm as rigorously as they had in the bubble's aftermath.

Michael Kwatinetz of San Francisco's Azure Capital agreed that the era of "fluffy" investments was over -- not a bad thing if healthier and more fiscally responsible companies emerge.

"Get your burn rate under control. Even the best companies are cutting their forward expense rate," Deninger advised.