VC chill could slow innovation

Sequoia Capital may have said it best at an early October meeting with portfolio executives. The venture capital firm posted a sign on the door bearing a tombstone that read “R.I.P. Good Times.” The global financial crisis has cast a dark pall over the VC community, suggesting high uncertainty in the near-term availability of venture funding for telecom start-ups and, in turn, a potential dampening of technological innovation for an unknown period of time.

“The overall sheer impact and volatility is pretty much unprecedented in the lifetimes of most people investing in venture,” said Sal Tirabassi, a partner at MC Venture Partners who also sits on the board of Airband, a WiMAX service provider. “Anybody who's prudent is going to say something really fundamental is going on here. The only rational course of action is to proceed with caution.”

VCs are struggling to reconcile the harsh macroeconomy with their belief in the growth drivers in telecom: the demand for increasing bandwidth speeds and mobile applications, for example. At the same time, the market turmoil will likely stimulate VCs' opportunistic impulses.

“There could be some interesting buying opportunities out there,” Tirabassi said. “A lot of people out there could be vulnerable. We're keeping our eyes peeled for that.”

Those dynamics might even lure buyout firms down market to participate in the venture arena, as they did when the dot-com bubble burst. On the other hand, general uncertainty in the overall market might dissuade such firms from straying too far from their traditional expertise.

Until conditions improve, VCs will resort to the safest bets, which could have a chilling effect on innovation. Unproven technologies may take a backseat to incremental improvements. In general, new ventures will likely have to take a backseat to VCs' existing investments.

“First and foremost, we're making sure that we're taking care of our own,” Tirabassi said.