New report shows signs of life in deal market
Wednesday, 06 January 2010 16:25 | 
The VC industry is strengthening and deal activity is stabilizing, due to optimism around the deal drivers of confidence, credit and cash, Ernst & Young’s annual deal outlook report indicates.
Nearly all aspects of the global economy are feeling the impacts of the economic downturn. The Venture Capital (VC) industry, for one, faces a number of difficult challenges: falling demand for portfolio company products and services; a dearth of exit opportunities through Initial Public Offerings (IPOs) and acquisitions; and the need for tough decisions about the prospects of some portfolio companies.
But while the challenges are significant, a number of factors suggest that the industry will soon move from the challenges of survival to opportunities for growth. First, the venture industry is applying many of the lessons learned in the aftermath of the technology bubble of 2000. VC Õrms have reacted quickly to assess their portfolios in light of the downturn and to set aside reserve capital to support companies with the potential to succeed in the long term. Portfolio companies’ strategies are being adjusted to the new economic realities with cost management, an intense focus on the customer value proposition and overall operational excellence.
Most important, venture-backed companies are identifying and pursuing the opportunities inherent in a downturn — “Never waste a good crisis” has become the new industry catchphrase. These opportunities include the ability to access cheaper resources, attract the best talent more easily and overtake or acquire struggling competitors. Forging innovation partnerships with large corporations that increasingly view innovation as a primary source of competitive advantage is another opportunity to be seized. Honing a business model and innovation strategy that work in a downturn can pay impressive dividends on the upswing.
Indeed, many of today’s market-leading companies were founded or received their first round of venture financing in recessionary periods — Hewlett-Packard, Apple and Cisco, Starbucks, Intuit, Skype and Shanda, to name just a few. While it is hard to predict which venture-backed companies will emerge as market leaders this time, it is safe to say that some will develop and bring to market great new innovations and become the billion-dollar enterprises of tomorrow.
As you will read in our interviews with leading VC investors around the globe, the work of funding great new companies continues despite the difficult economy. Investors point to cleantech, cloud computing, Software as a Service (SaaS), genomics and consumer applications as a few of the areas in which they expect to see disruptive innovation.
Given the importance of innovation to the world economy, VC funding should not be taken for granted, especially in some of the most trying economic conditions since the Great Depression. That is why we make a number of policy recommendations for the support of the VC ecosystem: incentives for innovation and entrepreneurship in government stimulus packages; cross-border cooperation to improve the Öow of talented individuals; and a multinational task force to develop a plan to increase the number of IPOs by venture-backed companies.
From survival to growth, our seventh annual report on venture capital, examines the state of VC today and provides insights into such topics as strategies for seizing opportunities in the current downturn, managing working capital and concerns for technology companies. Throughout the report, leading company executives and VC investors from around the globe share their own perspectives on the impacts of the downturn and strategies for success. We are grateful for their contributions.
We hope that you will find this report a source of valuable insight and look forward to working together with you on the global challenges and opportunities that lie ahead.
Full PDF: From survival to growth Global venture capital insights and trends report 2009