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But while most VC firms will take a more conservative approach to investing, that does not mean funding will dry up completely. “Companies with good plans will still be able to raise money,” says Howard Anderson, also of the Sloan School and himself an experienced venture capitalist. “But funds will take longer to raise money. And you’ll see fewer ‘big bang’ introductions of new companies that cost a fortune.”

Others say that venture-capital funds will feel pressure to ask entrepreneurs to cut costs and work with less capital, and that investors will have less patience with underperforming companies. This pressure was evident in a recent presentation by Sequoia Capital, a prominent venture-capital company with a successful investment record. Last week, in an “emergency meeting” with the CEOs of its portfolio companies (details of which were leaked online), Sequoia representatives warned companies to cut costs, reduce staff, and focus on profitability in preparation for a dramatic downturn.

Certainly, Anderson says, there’s likely to be a noticeable shift from investment in long-term and more speculative research projects to shorter-term development of technologies that promises a quicker financial payoff.

Nevertheless, most experts think that both investment and innovation will persist as they have through previous economic downturns. Some observers even suggest that the current economic crisis could create as many opportunities as it destroys. For one thing, Lo points out, a tremendous number of opportunities have been created in the banking and financial-services sectors. “I would expect an unusually large number of startups to be focused on new technologies for addressing the issues that led to our current crisis,” he says. In particular, Lo mentions the development of new electronic-trading and risk-management tools.

The austerity and pain of an economic recession could also have positive consequences in the long term, Lo believes. He suggests that the financial crisis will lead to not only a clearing out of the financial-services sector, but also to much stronger regulation, which will have beneficial results. “No doubt the recession, which I suspect will last at least two years, will be painful,” Lo says, “but during that time, markets and regulators will develop a series of innovations that will lay the groundwork for the future growth of the global economy, which will be spectacular.”

Antoinette Schoar, a professor of entrepreneurial finance at MIT, agrees that looming changes on Wall Street will create new opportunities. “I think the best VC funds won’t have trouble raising funds,” she says. “Greater regulation of the banks, and the disappearance of investment banks, will [also] provide a lot of interesting investment opportunities for private investors.”

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Credit: Technology Review

Tagged: Business, venture capital, financial markets, investments, innovations, investing, market complexity

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