ARI SHAPIRO, Host:
This is Weekend Edition from NPR News. I'm Ari Shapiro. In his weekly address this morning, President-elect Barack Obama gave a name to the stimulus package that his transition team is putting together.
BARACK OBAMA: An American recovery and reinvestment plan.
SHAPIRO: And with it, Mr. Obama promised a new approach to government spending.
OBAMA: We can't just fall into the old Washington habit of throwing money at the problem. We must make strategic investments that will serve as a down payment on our long-term economic future.
SHAPIRO: The president-elect says he wants to create three million new jobs. Many of the details of the plan echo promises Mr. Obama made during his campaign. Those jobs can't come soon enough. Just two days into 2009, a closely watched manufacturing index compiled by the Institute for Supply Management was released. And it showed that U.S. factory activity fell to a 28-year low in December. What does that mean? Well, the last time this happened, the nation was on the verge of the recession of the early 1980s. Now U.S. auto companies are just barely standing. And if they go down, the manufacturing sector could become an enormous drag on the entire economy.
Economic fear is spreading, and that makes everyone less willing to take risks. Even venture capitalists who thrive on risk are being far more cautious now. That can be painful for some small startup businesses. It means they may remain at a fledgling stage for longer than the founders and their investors bargained for. NPR's Yuki Noguchi reports.
YUKI NOGUCHI: In a normal year, legions of entrepreneurs get funding from private investors who like their concept. It's called venture capitalism. The idea is for a young company to incubate and grow on this private money for a few years. And if the concept works, it all pays off when the company is sold. But if there's no buyer, there's no payoff. Mark Heesen is president of the National Capital Venture Association.
MARK HEESEN: Just like you have a teenager that you thought would be out of the house by now, we have companies that we thought we would have sold or have gone public by now, and they're still at home.
NOGUCHI: During the first three quarters of 2008, the association says only six venture-backed companies sold shares to the public through initial public offerings, or IPOs. That compares with 86 for all of the previous year.
HEESEN: We saw zero IPOs in the second quarter of 2008. That's the first time in the 30 years that we've been tracking this that we've never had an IPO in a quarter.
NOGUCHI: One of those shelved sales was a company called Convio. The company designs software that helps nonprofits track and communicate with their donors. The company did well and hoped to sell shares to the public earlier this year. Jim Offerdahl is Convio's chief financial officer. He says when the company had hoped to pull the trigger, there simply was no interest from investors.
JIM OFFERDAHL: We decided that good companies don't go public in bad markets.
NOGUCHI: In August, Convio scrapped its plans. For the investors in startups, this scenario repeated over and over could create a major backlog. Instead of reaping those profits through sales, venture capitalists are facing the prospect of having to fund their companies for longer. Trevor Loy is managing partner for Flywheel Ventures in Santa Fe. He says this is starting to happen to him. Flywheel has $40 million invested in 23 companies. In order for his fund to keep investing in new companies, he needs to get the proverbial kids out of the house and finding their own money source. And in order for that to happen, the stock market and the economy needs to recover.
TREVOR LOY: If you don't see the capital markets' interest in the companies funded by venture capitalists pick up in another year to two years, that runs a risk of absolutely destroying the engine of innovation in the country.
NOGUCHI: Loy says that's because historically it's the private investors who've been willing to take risks on new technologies. He says bigger, more established companies tend not to fund revolutionary ideas. Companies like Google and Apple and many companies in biotech and green technology started out funded with seed capital from private firms.
LOY: Whether it's climate change and environmental sustainability or, sort of, human health and disease, or the need to build infrastructure for three billion people who are joining the middle class around the world, those are all challenges whose only solutions involve hardcore, deep innovation. And venture capital has had, certainly, a pretty outsized role in fueling that innovation over the last few decades.
NOGUCHI: For now, young companies with great ideas might survive with funding from existing investors. But for entrepreneurs looking for cash, a protracted downturn means having to cast their nets wider or just running on fumes for a while. Yuki Noguchi, NPR News.