How VCs Are Coping With the Downturn

Who are these strategic buyers? Think about any major tech firm with plenty of cash. At last count, Google (GOOG Quote) had $12 billion in net cash, Microsoft (MSFT Quote) had $23 billion, Apple (AAPL Quote) had $25 billion, and Cisco Systems (CSCO Quote) had $21 billion.

Strategic buying is already in the stated plans of Oracle's (ORCL Quote) Larry Ellison, who has a far smaller $2 billion to play with when you back out his company's debt load. At an annual meeting with shareholders in October, he told investors that "acquisitions that we've been looking at for some time are less expensive for us."

Even smaller firms with, say, $1 billion in market value and $300 million in cash will look to get into the action.

Make no mistake, it's a buyer's market, and the VC backers are going hat in hand to potential buyers. And only businesses that represent meaningful opportunities will likely find interest. My VC contact suggests that you look out for deals that will help spur growth in new niches for existing tech players, offsetting what is likely to be a challenging year for organic growth in 2009.

Thus far, only Cisco and Oracle have aggressively trolled for new businesses. You can get a sense of the type of deals to watch by looking at Cisco's $120 million purchase of Pure Networks in July 2008. Cisco decided it wanted to play a larger role in the emerging market for networked home appliances. Rather than internally fund this initiative, Cisco acquired a turnkey platform on which to build this new niche.

Although Cisco paid $120 million for Pure Networks, recent revaluations of many tech companies imply that the deal would have been done for well under $100 million today. And VCs, knowing that it is a buyer's market, will need to be careful not to try to play buyers off each other, as is often the case when the macro backdrop is more favorable.