Tech Firms Prepare for the Worst

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Even small firms are already preparing for a much rougher ride. "The odds are for a big slowdown, so we're tying to conserve cash," says Dave Grannan, CEO of Vlingo, a speech-recognition company based in Cambridge, MA. Although the company has seen no drop in interest for its products, the economic outlook has forced Grannan to implement a hiring freeze (he had been planning to hire 15 new staff this year). He also hopes to raise $6 million to $8 million in extra funding from potential partner corporations to help shore up the business.

Some businesses may be able to batten down the hatches, but venture capitalists still need to find a return on investments, so they are keen to play down the worsening climate. "Ultimately, money is always looking for a return," says Sim Simeonov, a technology partner at Polaris Ventures. "If you can show a great new company which is growing, then there may be a reverse dynamic of capital wanting to flock to it."

"We don't expect anything to affect startup funding in the short term," adds Isaac D. Barchas of Austin Technology Incubator. "But I am literally touching wood as I say this."

Greg Blonder, a partner at Morgenthaler Ventures, says that any recession will be tougher on middle- and late-stage companies, which need to raise money for growth. And he adds that the outlook remains foggy at best. "I don't think anyone knows the future well enough to say IT managers are going to cut back more than advertisers."

Some investors will refocus their attention on areas that are more resilient to the downturn. One example, according to Boston University's Cockburn, may be health-care technology. "Health care is kind of recession proof," he says. "If you've got cancer, you can't really tighten your belt and put it off for six months."

However, Steve Burrill, a venture capitalist specializing in biotech , is less sanguine. "This is a massive reorganization of capital market structures," he says. "Over the last 40 years, capital has been reasonably available, reasonably cheap, and reasonably consistent. In the future, none of that is going to be true."