“Obviously this period is the toughest that we’ve probably seen in our investment lifetimes,” said William Tai, general partner at Charles River Ventures, at the Dow Jones VentureWire Technology Showcase in Redwood City, Calif., on Tuesday.
Tai said he was reminded of how dire the overall economic environment is when his firm had a guest speaker last week: Larry Summers, the former Treasury Secretary under President Bill Clinton. Summers, Tai said, told the audience that typical recessions are caused by one or two of five “vicious cycles”–liquidation, deleveraging, credit acceleration, lower spending and unemployment–from which economies can typically self-correct on their own. But we are now experiencing all five, Summers said, so the economy can recover only with massive global government intervention.
At the VentureWire conference, Basil Horangic, partner at North Bridge Venture Partners, summed up the downturn thusly: first, how bad will portfolio companies get hit, and second, what will happen to the flow of cash from investors hit hard by the economic crisis.
“It’s clear that there’s going to be less money available just by the very fact that if your domestic stock portfolio is down one-third and the international stock portfolio is down two-thirds, all of a sudden your private equity allocation is two times over or even 2.5 times over,” Horangic said. “And your boss is screaming, ‘Why do we have so much private equity?’”
So commitments from limited partners, as these investors are known, will come down, he said. “And the easiest way to [cut allocation] is not make new commitments. So that’s inevitable. We just have to get an idea of how big that impact is going to be,” he said."