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TheStreet Open House

VC Funding Down Amid Economic Worries

Stocks in this article: P LNKD

NEW YORK ( TheStreet) -- Although marquee private tech firms like Twitter and Airbnb continue to rake in massive funding rounds, venture firms have started to scale back on their investments in tech, citing economic uncertainty, difficulty raising funds and concerns about a bubble.

These fears caused a slight dip in venture funding for the second quarter, as investors plunked down $8 billion in 776 deals for U.S.-based companies, a 5% drop in investment and 2% decline in deals from the same period last year, according to a recent report from Dow Jones VentureSource.

Twitter co-founder Biz Stone helped lead the company to a reported $7 billion valuation.

Worries about the macroeconomic environment are a key reason for caution among venture investors, said Dr. Mark Cannice, a professor at the University of San Francisco. His Silicon Valley Venture Capitalist Confidence Index found that confidence among West Coast investors fell significantly in the past three months. The debt ceiling crisis doesn't help either, which could create an environment that is unfriendly to the venture industry.

"Some corporations may start to husband their cash more closely because of concerns about the financial markets, which could limit the number of acquisitions they make and reduce exit opportunities for VC-backed companies," said Cannice.

A challenging fund-raising environment for VC firms may also be to blame for a dip in investments, said Barry Kramer, a partner with Fenwick & West, who represents tech start-ups.

The number of funds that received investments from institutional investors fell 23% in the past quarter according to the National Venture Capital Association, meaning it's becoming increasingly difficult for venture firms to find the capital to back start-ups.

Venture capital funds depend on institutional investors such as pension funds and endowments to raise capital, which they then invest in start-ups. And when there's economic uncertainty, institutional investors may be less willing to put their money into a high-risk investment.

"If your firm isn't at the top 20% of the industry, the prospect of raising a new fund is very dire and bleak right now," said Michael Greeley, a general partner at Flybridge Capital Partners.

The second quarter may also signal a cooling off from venture firms that have been investing capital at a record pace.

"VCs only have so much bandwidth they can deploy," said Max Chee, a principal with Millennium Venture Partners. "They've already put a lot of money out there and may want to spend more time on their boards, which could eat into the time they have to look for new deals."

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