Venture capitalists pessimistic over funding small companies

Small companies face the threat of a funding crisis next year as the supply of venture capital dries up, a leading firm of accountants warned today.

Only one in 100 start-up finance houses foresees an improvement over the next six months, according to the quarterly survey from Deloitte & Touche. More than 80 per cent of the 770 venture capitalists questioned said they expected the economic situation to deteriorate. Meanwhile, confidence among venture capitalists in the likely performance of the companies they invest in had fallen to an all-time low, it said.

Well over half (57 per cent) expected their clients' performance to decline compared with 45 per cent in the previous quarter. Likewise, 79 per cent said they expected debt finance to become harder to raise while a similar number expected that raising equity funds would become more difficult.

Quintin Barry, a corporate finance partner at Deloitte & Touche, said pessimism was to be expected given world events since the last survey. "We won't see spending sprees just yet," he said. "But where transactions are going ahead, at reduced multiples and on depressed earnings, there are opportunities for those willing to open their cheque books to pick up bargains."

According to the Centre for Management Buyout Research, there was a sharp fall in deal activity for September and October, with about half as many buyouts compared with the same period last year. Mr Barry said that in the current M&A environment with pressure on pricing, venture capitalists were unlikely to sell, unless forced, in what would be a buyers' market.

The Deloitte survey showed that 96 per cent believed restructuring activity by UK Plcs as a result of economic uncertainty would be to create investment opportunities. "There are vast sums of money in UK private equity funds and they don't plan to be giving them back to providers," Mr Barry said.