So 2008 was a terrible year in a lot of ways, but it was a good year for startups to raise capital, except for the Q4 following the market downturn.  So how will 2009 look like for those looking to raise VC money.

The good news, VCs have raised a lot of money (new funds) the last two years, which means that many of them have sufficient capital to invest in new companies.   The VCs can’t simply stop investing all together, so checks will be written to the “right” companies.  During the last recession in ’01-’03, there was still a significant amount of VC activity; in 2002 over $4B was invested in early stage companies, 2009 should see as much, but I predict it will be more than 2002 .  Other good news, there a lot of qualified unemployed professionals who are seeking work; this is a great time to “cherry pick” some engineers, sales, marketing, finance experts.   Not only is there a breadth of talent available, but they are also willing to work for less than they did in 2008.   Lastly, the costs of starting a business continues to go down, as everyone who is providing a service is a lot more willing to reduce their cost of services.  For those startups that are utilizing hosting services such as Amazon, Rackspace, etc, this area is becoming a lot more competitive and therefore prices should go down for these services as well.

Well that is most of the good news, the bad news; IT, Marketing, Ad budgets are going to continue to get cut.  Consumer spending will be reduced as well.  Companies who need significant revenue to maintain their business, will be in a life or death situation.   For those startups who raised VCs funds in 2007 or 2008, many of them will be out of business in the next 6 months as they will not be able to bring in the revenue needed to keep the lights on and will not get additional funding for their VC investors.  Companies that have excess money to acquire startups, will be in a great situation as there will be plenty of dying companies available, it going to be a buyers market!  This is good news for startups, as there will likely be less competition and there could be an opportunity to buy IP/client base at a heavily reduced prices.   If you are raising VC money, you could factor a portion of amount raised for acquisition purposes (this is not usually in business plans, but now could be a good time to do so).

In regards to specific positive sectors areas that VCs will be looking to invest in will include, mobile, gaming, energy efficiency, life science, and SaaS related companies.

If you look at the mobile sector, the proliferation of smart phones continues as both professionals and consumers are adopting these devices at a rapid pace.   I  just read a blog post this morning about a Blackberry device selling for $20, that is so cheap!!!  The Blackberry Curve is selling for $99, which is a good deal as well for a great phone.  Even the iPhone is going down in price, you can now buy a refurbished iPhone for $99! So kids, teenagers, college students will easily be able to adopt these inexpensive devices.   The adoption of these type of devices, allows startups an additional way to reach their clients and provide an avenue for more revenue.

In regards to gaming, this is an area that continues to increase in adoption and money spent.  The pre-teen and teen generation has always adopted gaming and this will continue.  There are GenX/Y and baby boomers who are gamers, but there is still a substantial percentage the historically have not been interested in gaming, but are not starting to become interested with the help of the Wii, iPhone and internet based casual games.  Although the broader gaming sector is saturated with competitors, there are still areas for companies to make  money.

Cleantech investing reached the peak in 2008 (in terms of dollars invested) and most expect that dollars invested in this sector will continue at a healthy pace.  A lot of the VCs invested in solar and biofuel companies, which accounted for the largest percentage of the invested dollars.   These two sub sectors have been very capital intensive and there have been few companies which have performed as expected;  there will be some consolidation in this sector.  In 2009 a  lot more funds will invested in cleantech companies that are more capital efficient than solar and biofuel. For example, software based cleantech companies will get more interest as well as mobile/PC components that reducing heat and energy consumption, such as battery, antenna, CPU, screen related companies (which ties to the points made regarding the mobile sector).

Life Science and health related companies are not as susceptible to the ups and downs of the economy, as people need to stay healthy.   In addition, the baby boomer generation continues to get older and need more health related services.  I don’t expect to see a big change in VCs dollars in the Life Science sector in 2009.

Lastly, SaaS (Software as a Service) companies will continue to receive VC dollars.  SaaS continues to displace traditional software which was sold based on 3 year contracts, was installed behind the firewall, which caused a lengthy sales cycle.  The adoption of SaaS by large and medium sized companies will continue as traditional software contracts are expiring and are likely to be replaced with companies providing a similar solution but delivered via SaaS.

One area that is going to see a lot less VC money is consumer internet companies.  This sector has seen a lot of investments over the last several years, but has very little meanigful exits (this has been the case for most sectors).  More importantly companies in this sector have failed to monetize their userbase and unless a company has a real revenue model (beside advertising), raising VC money is going to be real tough!!!

The key to raising some money in this economic enviornment is to establish a great team and even more critical now is to have some recurring revenue (assuming you are a software/service company).   The VC money is out there, so go get it!