Investment in IT drops 40 percent

Further evidence of the global economic slowdown was revealed yesterday with the news that investment in US-based IT startups dropped a massive 40 percent in the fourth financial quarter 2008.

According to figures obtained by CNet – quoting a report by VentureSource – investment in IT related companies across the US fell by a massive 40 percent in the fourth financial quarter, representing a loss of almost £1 billion compared to the previous quarter.

Overall venture capital provision for IT companies dropped 14.5 percent year-on-year, and the report shows a clear indication of why: despite positive growth in the first quarter, IT companies started a process of financial decline in the second quarter which only accelerated through the remainder of the financial year.

With venture capital money harder to find – especially for telecommunications and networking start-ups, which saw investment drop a whopping 32.3 percent in 2008 – many newly formed companies are struggling to keep themselves afloat for long enough to become cashflow positive. With investment drying up, the danger is for the market to become stagnant – and for many advances in technology to be ignored in favour of “tried and tested” systems.

It hasn't all been bad news for the IT sector, however: the report showed that – despite a Q4 fall in investment of 30.5 percent – the information services sector came out of last year smelling of roses, showing a 16.9 percent gain in investments when compared to 2007.

Do you think that investors need to grow a backbone and spend their way out of the current economic slowdown, or are the venture capitalists right to hang on to their money for the time being? Share your thoughts over in the forums.