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Tough times ahead for Silicon Valley?

Financial crisis puts squeeze on tech sector start-ups.

(Page 2 of 2)

The prime concern is whether venture capitalists will be able to raise additional money once the current stockpile runs out. An NVCA report shows that fewer venture capital firms were able to raise money in the third quarter than in previous years.

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But venture capitalists and analysts are quick to point out that top-tier firms such as Sequoia will most likely face no real difficulty drumming up money for the future.

For Gregory Gretsch, managing director at Sigma Partners, a venture capital firm with offices in Menlo Park, Calif., and Boston, less investment down the road is actually positive. “There is a belief within the investor class that these things take a long time, and that this might be an expanded bad market,” he says. “The bar is going up.... Gone are the firms that will just pay up [for any new company].”

As a result, start-ups that do receive funding will probably make better products, have less expensive valuations, and a greater probability of generating big returns for investors.

“This is wonderful for the venture business,” Mr. Gretsch says.

For serious investors, history may serve as a useful guide. Today’s technology sector, like most parts of the economy, is cyclical.

The current crisis, though, is unlike the dotcom bubble of the late ’90s when Internet company valuations were stratospheric while few paid attention to how to actually generate revenue.

Today, the fundamentals of technology businesses are stronger, and much of the difficulties Silicon Valley companies face have more to do with overall consumer spending than unrealistic business plans.

In fact, the current economic slump may in some ways lead to better innovation, suggests Brett Bullington, a former executive at Excite@Home turned angel investor and Web entrepreneur.

After the tech bubble burst in the late 90s, he says, “a lot of companies quit innovating,” but this simply opened the door for a company like Google to make its mark.

“The same thing is happening to business models,” Mr. Bullington continues. “There are cutbacks at [companies including] eBay and Yahoo.... [So] who is going to fill this need for creativity? Clever new start-ups that don’t necessarily need massive amounts of cash.”

While every investor is still looking for the next Google or Facebook, once-in-a-decade companies are not the sole focus of investor dollars these days, notes Paul Graham, a longtime investor in young tech companies and founder of Y Combinator, a start-up incubator in Mountain View, Calif.

“Unless your site is something that can kick ass, you’ve got to have something you can charge for,” he says. “Ideas can either be practical and unsexy or absolutely brilliant.”

Adam Sachs, chief executive of Ignighter, a New York-based website that focuses on group dating (your group of friends goes and does stuff with a group of others) breathed a sigh of relief recently after securing $1.2 million in funding from “angel” investors, a funding source that is eluding many of his start-up peers.

“It was extremely, extremely scary to watch the market drop while we were asking for money. And angel money is even scarier. These are people who have watched their net worth decrease by a third or a half,” Mr. Sachs says. “If we had started a few weeks later than we did, it would have been much harder.”

Despite optimistic initial plans, Sachs says he’ll have to make his first chunk of investment dollars last much longer than he had anticipated.

“We are going to be really careful as we go into the future,” he says. “I’m just so fortunate to be here.”