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Publication Date: 12/1/2008
Archive >  December 2008 Issue >  Tech Horizons > 

VC Cash Crunch May Impact Innovation

The financial mess has everyone jittery. I scan the news feeds every day and there are more dire predictions out there than you can imagine. No one knows for sure what's going to happen, yet at the same time there are few, if any, optimists.

I don't have a handle on what the future holds; I have no crystal ball to gaze into, and I don't know if a recession is in the works or not. One thing is for certain, however, and that is the simple fact that quarterly profits across the board are dropping, business seems to be slowing somewhat, and forecasts are not sunny. Around the world, the story is the same; one example is LG Electronics, who announced that "third-quarter net profit plunged more than 90 percent as weakness in the South Korean won made it more expensive to service debt denominated in foreign currency." This is serious stuff in part because of the simple connection between the availability of money and a manufacturer's ability to operate.

But the percussive echoes are rebounding deeper, with a certain seismic quality.

If we take a moment to talk about advances in technology — which is what this monthly column is all about — then there is cause for concern. Advances in technology, and innovation, are what drive industry to create better products and push ahead with improvements that create competitiveness in technology, and thus create globally competitive manufacturing. Innovation drives the market and drives technological advances. Money drives innovation — or at least makes it possible for research and improvement to occur.

Still, we say, no matter what happens, innovation will continue. Will it, though? More importantly, of course we suspect that it will, but will it do so on the level that it needs to in order to keep industry moving?

I'm going to quote a story here — in its entirety — that came off the wires of the Associated Press, regarding the impact of a tighter money supply on technology development. If it follows through, this will have, I suspect, more of a long-term chilling effect on technology development:

San Francisco (AP) — As it becomes increasingly difficult to cash out of their previous investments, venture capitalists are gradually closing their financial spigots in what could be the start of a long, dry spell for entrepreneurs.

Although a drought hasn't set in yet, it's looking inevitable as the ripple effects of a worldwide financial crisis rattle venture capitalists.

The trepidation was evident in the third quarter when the venture capital flowing to startups totaled $7.1 billion, a 9 percent decline from the same time last year, according to data released Saturday by Thomson Reuters, PricewaterhouseCoopers and the National Venture Capital Association.

It marked the first quarterly decline in year-over-year venture capital investments since the final three months of 2005. And it was the largest decrease since the spring of 2003, when the industry was still recovering from losses sustained in the dot-com bust. Now, venture capitalists are girding for the most challenging period since an Internet bubble that they helped create finally burst in 2001.

"We have been through this before and, hopefully, we have learned some lessons," said Mark Heeson, president of the National Venture Capital Association.

Two of Silicon Valley's best-known venture capital firms, Sequoia Capital and Benchmark Capital, have already advised companies in their investment portfolios to redraw their business plans for next year and cut costs so they have a bigger cash cushion to weather what is expected to be the worst recession in a quarter century. In a slide presentation this month, Sequoia Capital — whose past successes include investments in Google Inc. and Yahoo Inc. — advised startups to "get real or go home."

The comedown this time shouldn't be quite as jarring in this cycle, mainly because venture capitalists haven't been as loose with their money as they were during the dot-com boom. Venture capitalists invested $200 billion from 1999 through 2001. In the nearly seven years since then, venture capitalists have invested a total of $168 billion.

A purge already has started at some startups. Electric car maker Tesla Motors and online advertising service AdBrite both disclosed plans to trim their staffs during the past week. Other cutbacks seem likely for any still-unprofitable company that isn't meeting its budget projections because raising more money will be difficult. "This is not the time to be missing revenue (projections), because you need the cash to live," said Faysal Sohail, managing director of CMEA Ventures in San Francisco.

The drop-off in venture capital investments during the third quarter would have been much more dramatic if not for the rising interest in biotechnology and alternative energy — sectors that traditionally require a significant amount of cash before they become profitable.

Biotech startups raised $1.35 billion from venture capitalists, a 21 percent increase from last year, while alternative energy, or "clean tech," raised $1.04 billion, a 17 percent increase.

With few exceptions, venture capitalists are becoming particularly reluctant to invest in startups seeking their first round of financing because the financiers can't easily extract the money that they have invested in other startups.

With the stock market in upheaval, investors haven't been willing to roll the dice on the unproven — albeit promising — companies typically funded by venture capitalists. So far this year, just six companies backed by venture capitalists have completed initial public offerings of stock, the lowest volume in 31 years. Just one venture-backed company, Rackspace Hosting Inc., has gone public since March.

The downturn in the stock market also figures to make it tougher to sell startups to larger companies that are already public. The buyers in those deals typically finance those purchases with their own stock — a currency that's worth dramatically less than just a few months ago.

There were 58 acquisitions of venture-backed companies in the third quarter, a 43 percent drop from the same time last year, according to Thomson Reuters.

The climate means venture capitalists are having to spend time and money on their existing investments rather than taking on new challenges. Companies soliciting their first round of financing raised $1.5 billion in the third quarter, down from $1.9 billion at the same time last year.

To make matters worse for entrepreneurs, the credit crunch and slumping real estate market is closing financing options outside the venture capital industry. When entrepreneurs are looking to raise their first $1 million, they often rely on credit cards and home equity loans, but beleaguered banks have been imposing more restrictions on those sources.?

Is there any good news out there? Well, yes in fact. In a recent news item, Intel Corp. announced that it is committing $120 million over the next decade to fuel more interest among youth in math and science. The funding, according to a report published in EE Times, from the Intel Foundation for its long-time science competition partner Society for Science & the Public supports the company's Intel Science Talent Search and Intel International Science and Engineering Fair. The support also adds a youth outreach program plus an online science community and science fair alumni network. This is one bright spot, but it could be one of many, whereby funding and support for research and development, or certainly (as in this case) interest in the sciences on the youth level (starting early) is provided by private foundations. Can we look to trade organizations to play a greater role in support for the promotion of technology and innovation? Organizations such as SMTA and IPC? Surely, but again, not perhaps without greater funding from their members, once again a conundrum. It's also a significantly different issue than that of withering VC investment, but a positive note nevertheless.

There's more, as EE Times' Mark LaPedus reports: "The $120 million is the largest single commitment in the history of the Intel Foundation, according to Intel (Santa Clara, Calif.). It extends its title sponsorships of the Intel Science Talent Search, which began in 1998, through 2016, and the Intel International Science and Engineering Fair, which began in 1996, through 2019. Intel's new commitment, announced Monday (Oct. 20) at the U.S. News and World Report Education Summit in Washington, was coupled with a national challenge to states to send more young people to the science competitions that support tomorrow's innovators. In 2008, only 19 states had finalists participate in the Intel Science Talent Search." (Read the entire story at

These competitions are just one aspect of Intel's annual investment of more than $100 million to improve education and technology literacy around the world. Intel has invested over $1 billion and Intel employees have donated over 2 million hours in the past decade alone toward improving education in 50 countries."

Talking to Aliens
Searching the wires for news of technology development has its ups and downs, but there is always something out there that will give me a chuckle. Some of the news has real interest to the visionary or entrepreneurial spirit; some is simply silly, such as this item posted on, titled "Chatting With Aliens — Researcher Aims to Create Alien Translator". The story relates that "John Elliott of Leeds Metropolitan University (UK) says he has the tools to start deciphering alien languages into words and sentences. Elliott, the academic leader for Artificial Intelligence in the School of Computing, is hoping to use the power of the computer to decode unknown languages (from Earth or beyond) so he can `aid the search for extra-terrestrial intelligence.' Elliot developed a computer program that analyzes 60 languages around the world, pulled from raw text samples available on the web. He hopes that finding a trend in human expression will help us understand language structure better. There's a distinct pattern in the way people talk, determined by how much information our minds can understand at a time.

"Elliot hopes that amassing human phrases will give us clues to figuring out how an alien language might be patterned. That is of course, assuming they use grammar at all. Or if they even exist. While Elliot thinks alien tongues would be very different than English and other human languages, at least his program might give us a chance of breaking up any extra-terrestrial messages into nouns and verbs."

Pardon my skepticism, but it sounds as though Prof. Elliott has been watching too many episodes of Dr. Who. Since we have no confirmed messages from alien intelligence — not even anything that remotely appears to be intelligent radio messaging from Outer Space — what is Prof. Elliott starting with? Don't you need to input raw data into a computer for it to generate a meaningful analysis of result? Some snippet of alien-speak? A more down-to-Earth task — and one perhaps infinitely more difficult — might be the challenge of deciphering Teen speech — that odd language spoken by the 13 to 19-year-old age group — for some meaning that adults can actually comprehend; but the sun could well be a cold rock by then.

Better Health Through LEDs
We already know the benefits of LEDs as a replacement for incandescent lighting and even compact fluorescent technology. They are extremely energy-efficient and durable. But medically therapeutic? This is an odd twist, and perhaps of interest to many with the focus on LED manufacturing right now. Who would have guessed?

ScienceDaily (Oct. 20, 2008) — Researchers in Germany are describing a potential alternative to Botox and cosmetic surgery for easing facial wrinkles. Their study reports that high intensity visible light from light emitting diodes (LEDs) applied daily for several weeks resulted in "rejuvenated skin, reduced wrinkle levels, juvenile complexion and lasting resilience."

In the study, Andrei P. Sommer and Dan Zhu point out that high-intensity visible light has been used in medicine for more than 40 years to speed healing of wounds. That light actually penetrates into the skin, causing changes in the sub-surface tissue. Until now, however, scientists have not known the physicochemical nature of those changes.

They report identifying how the visible light works — by changing the molecular structure of a glue-like layer of water on elastin, the protein that provides elasticity in skin, blood vessels, heart and other body structures. Figuratively speaking, the light strips away those water molecules that are involved in the immobilization of elastin, gradually restoring its elastic function and thus reducing facial wrinkles. "We are justified in believing that our approach can be easily converted to deep body rejuvenation programs," the researchers state.

That is a bit of a stretch — pardon the pun — but I can already see the potential for LED Spas.  

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