business

Venture Capital on the Rebound

Investors are back in the hunt after a slow 2009, but they’ll be choosier than ever.

Venture capitalists are sniffing out deals, looking to generate activity after mostly laying low in 2009, with some dropping out of the field altogether in light of the shaky stock market and poor economy.

This year promises an upswing in activity: Look for venture investments to tick up to $19.75 billion compared with $15 billion last year. “We are working our way out of a tough environment,” says Mark Heesen, president of the National Venture Capital Association.

But start-ups will still have a hard time getting noticed. Venture firms are playing it safe, backing late-stage companies with well developed business models and solid profits.

“It’s a buyer’s market,” says Kate Mitchell, managing director at Scale Venture Partners. “For those firms with money, it’s a great time to invest.”

Health care firms are a big lure, particularly those that make medical devices. Biotech companies are also drawing attention. Technologies that reduce costs of health care and increase physician productivity are especially attractive. “We are looking all around to see what will save the system money,” Mitchell says.

Other popular draws: Mobile phone technology firms as smart phones become more prevalent, as well as businesses with goods and services geared toward growing Asian markets. A positive outlook, too, for companies that can make data centers run more efficiently. That’s because most data centers are massive operations that run on vast amounts of costly energy.

For entrepreneurs, the return of venture capital will be welcome, but the new environment means they have to work harder to get the attention of investors. “They have to be utterly realistic about chances for success,” Heesen says. And they will need to figure out how to spend their cash wisely so that they can grow big enough for an acquiring firm or public offering. “If you don’t invest in growth, you might miss an opportunity to be an industry leader,” Mitchell says.

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