Subprime Fallout Could Help Venture Capitalists

The sky is falling. The sky is falling. The ground is rising.

Could the subprime problems that have screwed up the market be a mixed blessing for Silicon Valley’s high-technology investors?

Highly out of favor in recent years, public offerings of technology start-ups are enjoying a mild resurgence. And some venture capitalists are arguing that the fragile momentum could be bolstered by the problems that mortgage-related securities have caused in the stock and credit markets. The rationale is that technology investments, because they are far removed from credit-centric securities, could look relatively enticing.

“One man’s ceiling is another man’s floor.”said Keith Benjamin, a partner at Levensohn Venture Partners, a San Francisco firm that focuses on technology investments.

The logic is being echoed in Silicon Valley, albeit somewhat sheepishly given the self-interest involved and the fact that there is but one major data point. That point is the initial offering of VMware, a company that makes software for servers. It went public on Aug. 14 at $29, and its shares surged 76 percent. VMware shares closed yesterday at $70.20, up $3.35.

The sharp rise of VMware, while the markets have been so volatile, punctuates what appears to be the end of the technology drought for initial public offerings. In the second quarter, 26 venture-backed offerings raised $4.3 billion, compared with 19 such companies raising $2 billion in the period last year.

Venture capitalists now hope that the disfavor technology companies engendered during the dot-com collapse is being more quickly erased — or put into perspective — by the risks evident in the struggling hedge-fund investment strategy.

But, that said, venture capitalists said the subprime-spawned troubles could be a mixed blessing — given that those troubles could take a negative toll, though an indirect one, on the seeding and growing of high-tech companies.

On the downside, venture investors said, they could have a tougher time raising investment funds from big financial institutions and other limited partners. The concern among some venture investors is that those institutions have less money because of recent declines in the market and also that they are distracted by all the fallout.

In addition, limited partners tend to some extent to lump together venture firms and hedge funds as alternative investment options. That means that as hedge funds come under scrutiny, some venture firms may get less money, said Paul Kedrosky, a venture capitalist in San Diego and author of the blog Infectious Greed.

Another concern is that tighter credit, by making it harder to borrow debt, could sap the ability of some larger companies to pay for and acquire start-ups. While technology investors would rather take their investments public than have them acquired, a potential dip in the mergers sector could hurt one of venture capital’s primary strategies for selling investments.

http://www.nytimes.com/2007/08/24/business/24venture.html?
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