VCs May Prop Up Startups in a Bad Economy

Whether we’re now in a recession technically or not is, literally, academic. The economy is not doing well in most sectors (save exports bolstered by a weak dollar). However, continuing VC investment may help soften the blow to the Internet or at least the startup segment of the Internet.

According to AP:

Although many experts believe another recession is imminent, venture capitalists say there is little reason to believe their investment pace will slacken this year.

In a show of confidence, venture capitalists raised $34.7 billion for future investments during 2007, a 9 percent increase from the previous year . . .

Internet startups also appear better positioned to weather any economic turbulence because the advertisers that generate most online profits appear likely to keep shifting their spending from television, print and radio to the Web even if there is a recession.

That latter point is somewhat debatable except for the largest or highest traffic sites. In addition, a climate of ongoing M&A activity may continue to provide money to Internet entrepreneurs despite a flagging economy. The final point is that in a bad economy there may not be many good places to put money so the Internet may benefit for that reason as well. 

Regardless, we’ll soon see how all this plays out and how the Internet is affected vis-a-vis traditional media.

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2 Responses to “VCs May Prop Up Startups in a Bad Economy”

  1. Scott Says:

    I don’t get the argument that web advertising will be immune to an economic downturn here in the US. A significant portion of online ad budgets go towards CPC/CPA advertising, which are so attractive b/c buyers can then look at the performance of each campaign against some type of desired action (i.e. a sale). If the economy slows down, by definition that means there will be fewer purchases by consumers and thus there will be fewer events on which publishers can charge. It’s simple math and if the consumption is not there, neither will be these ad dollars…even on a CPC basis, if people are not buying this means that conversion will go down for advertisers and thus they will lower their price per click bids.

  2. Greg Sterling Says:

    I agree that the Internet won’t be immune. The point above is that VC funding may enable the startups to survive it where they definitely wouldn’t in the absence of investor money. And the “bullish” attitude reflected in the passage I cite would appear to belie the larger economic trends right now. Of course that could all change if things really go south.

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