VCs throw cold water on portfolio companies

One after another, venture capitalists are stating the obvious to the companies they've invested in: Now would be a very good time to keep your money under lock and key.

From Sequoia Capital, which has had parts of its dire economic presentation to its portfolio companies aired out in the press, as reported in VentureBeat and GigaOm, to angel investor Ron Conway in his letter to his portfolio companies, the message is clear and persistent: prepare for the worst.

M&A and IPOs Worldwide and Tech

(Credit: Thomson Reuters)

And that preparation, as Conway noted in his letter to portfolio companies, includes cutting marketing costs, general and administrative expenses and, yes, even layoffs if need be. Sequoia was a bit more dramatic in its message, reportedly using a tombstone with the engraved words "R.I.P. Good Times."

Faced with a tightening credit market and the markets in a virtual meltdown, the VCs that fund these start-ups are busy dishing out sage advice--and companies are taking it to heart much earlier in the game compared with the Internet bubble of 2000.

And for later-stage companies, the M&A route is virtually the only game in town. The IPO scene, in this bearish market, has virtually shut down, with only 44 tech initial public offerings out the door so far this year, compared with 215 deals last year, according to Thomson Reuters.

Start-ups that are fortunate to land another financing round should expect smaller rounds and ones with lower valuations for their company.

And while most tech companies are capital efficient, meaning they need little money to fund their operations, the hot investment area of "green tech" is not as fortunate, noted one venture capitalist.

"One area that is very affected and needs large sums of capital to take off is the novel energy ideas like solar, biofuels, and large-scale energy projects," noted venture capitalist Geoff Yang of Redpoint Ventures.

He added that businesses that plan to rely on the credit markets and finance markets to make their business models work are the ones that are at greatest risk in this current economic climate.

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