How the financial meltdown affects high tech

Having worked in the financial sector before moving out west to start-up land, I have been asked several times over the past few days about the impact the financial meltdown will have on high tech.

At first, people may think the sectors are so far removed from each other that the impact would be minimal. I mean, come on. What in the world does Merrill Lynch, Lehman Brothers, AIG, and Bear Sterns have to do with the fate of start-ups in Silicon Valley and established giants like Oracle and Microsoft. Plenty when you take a closer look.

The big players like Oracle, Sun, Microsoft, and SAP – These guys will feel an immediate impact. Financial Service firms are some of the biggest spenders of IT budgets around. I can imagine memo’s coming from the top to CIOs at banks telling them to cut costs ASAP. Naturally, they will start to push back on upgrades to new software (sorry Vista), ask for greater concessions on license pricing, and in some cases, abandon plans for new technology deployments such as new hardware or new ERP applications. This will impact the bottom line of many established high tech firms. Given all the layoffs at these banks, you will see a lower number of Microsoft Office seats, Oracle seats, Laptops purchased, and less server side hardware and software bought over the next 18 months.

Still, companies such as Microsoft are large and diverse enough to absorb the storm without too much turmoil. Yet, I would not be surprised if I heard Sun report: “We did not meet our numbers this quarter due to decreased spending and turmoil in the financial sector….”

Why Green Technology may be in for a scare – I can see the biggest impact happening on Green Tech Investments. Green Technology requires a LOT of capital (wind energy is not cheap, have you seen how big those turbines are?). Most software start-ups can be funded in under $20 million and get to profitability or an exit with that investment. However, in Green Tech, the amount of investment needed in many cases go well past the billion dollar mark. With congress taking a close look at wasteful spending on green technology (remember corn), many VCs and Green Tech CEO’s were looking to the private markets for later stage capital. However, with hedge funds imploding, private equity shops dwindling, and banks going out of business, who will be left to write those billion dollar checks for a high-risk high-reward technology in Green? Not Uncle Sam!

I can see a lot of VCs taking less of a gamble on technologies that will require significant later stage capital. Instead, they will probably make investments in Green Tech companies that have lower capital requirements. No VC wants to pour $20 million into a company, and when it comes time for that company to raise $500 million for wind turbines, they will find it harder to come by people willing to foot the bill. It’s sad, but the financial meltdown may also cause an ozone meltdown.

More traditional start-ups in the valley are also being impacted. When hedge funds were popping up all over the place, they needed a new place to invest their money. One of the investments they started looking into was high tech startups. Entrepreneurs welcomed this with joy. It gave them another outlet to get funding outside of traditional VCs (just look at the private investments made in Facebook less than a year ago). However, with hedge funds now reverting back to their traditional channels and many closing shop, a lot of funding that entrepreneurs were expecting may never surface. This is a shame in my opinion. There are more great ideas in the Valley than ever before and a lack of funding will prevent many would be great companies from getting off the ground.

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