Global monitor: Start-ups see funding vanish as bigger firms suck up cash

Published on Saturday 2 August 2008 15:37

IN THIS city that never sleeps, the famous Brooklyn Diner – the one by Carnegie Hall, not in Times Square – counts Tony Bennett as a regular. The veteran crooner usually strolls across from his exclusive pad by Central Park for a mid-morning bagel and coffee.

Later on, diners include financial types taking an after-trading-hours Yellow Cab the five miles from Wall Street for a bite to eat. Lately they've not had much to sing about as they mull over yet another difficult stock market shift.

Also, what chances now exist of ever breaking out on their own with that sure-fire business venture to make their millions? It's easier said than done in these troubled times, and that includes the technology sector.

Morgan Stanley claims certain tech stocks are likely to continue to underperform as overly optimistic earnings expectations are reconciled with a slowing global economy.

Flagship names such as Google, Apple Inc, SanDisk and Texas Instruments have either missed their second-quarter expected figures or lowered forecasts.

Yet technology overall has been one of the strongest earnings performers through the downturn, according to Thomson Reuters data, growing an average 16% over the last four quarters.

Morgan Stanley makes a significant distinction. The stocks of internet companies such as Yahoo, eBay and Google may not be immune to a consumer slowdown as investors think long and hard about the road ahead.

The global finance house is less worried about areas of software and IT services it expects to perform well due to their high-margin recurring revenue and strong growth outlooks.

However, commentators report venture financing for young firms is dropping as established firms suck up more cash in order to survive.

It is an ominous sign for the high-tech hub's renowned entrepreneurial machine, as venture capitalists cut back on their investments covering the earliest stage of developments to instead provide extra financing for later-stage companies unable to go public.

The latest American National Venture Capital Association/PricewaterhouseCoopers report reveals that first-round financing has fallen by 12% compared with last year.

Such downward moves are felt on this side of the pond. Raymond Abbott, managing director of Edinburgh-based Alliance Trust Equity Partners, reports that its European investment model has now changed in favour of private equity funds.

"Basically, there is a desire by the trust to deploy more capital more quickly than could be done by making smaller, more resource-intensive, early-stage investments," he said.

So one less direct investor in the Scottish tech market, still reeling from the demise of Connect, the body that staged Dragons' Den-style fundraising events for young companies.

Alliance will continue to have an "allocation to venture". The trust recently took part in a funding pool of one of the latest early-stage tech investments conducted by Pentech Ventures out of its Glasgow office.

But Abbott is quick to point out that overall the area represents a small part of its total commitment to private equity: "I don't see the trend for early stage getting much better for some time, as there are fewer funds raised and the returns are poor."

Bigger tech funds still seem to be able to raise money when they need it. "And if they can have some sustained successes then it could ripple down in time," said Abbott.

If it doesn't, the Scottish economy will be starved of a new generation of young business ventures, technology or otherwise.