Venture Capital's Favorite Startups

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"No matter how much worse the economy could get over the next six to 12 months, there are many who believe that clean tech kind of rides above the economic uncertainty," says Mark Heesen, president of the National Venture Capital Assn. Demand for clean power from governments around the globe, along with renewed attention to cutting emissions from the incoming Obama Administration, has convinced investors to bet on solar and wind power, as well as hybrid cars.

Biotech's Promise

Likewise, Heesen says, biotechnology and medical device companies will continue to draw investors because the promise of their products to extend lives is so important. "We all are living longer, and we want to live longer, more productive lives, and biotech is at the cusp of that," he says. The startups Heesen predicts will suffer most from the downturn are IT firms that ultimately sell their products to consumers or businesses, because both are cutting spending.

Still, developing drugs or clean technology takes a lot of money, with long time frames for exits potentially made longer by an IPO drought and a tough market for acquisitions. One drug development company, IRX Therapeutics in New York, has raised more than $60 million since its founding more than a decade ago, mostly from high-net-worth individuals and some VCs, to develop treatments to restore immune function in head and neck cancer patients. "We're obviously a company without revenue in a business that eats capital," says Chief Financial Officer Jeffrey Hwang. He says the firm has had to cut staff by a third and delay clinical trials it planned for 2009, because he's not sure whether the funding will be there to complete them. "We're not going to start anything we can't finish," he says.

Heesen says many startups may face the same problem next year. He expects fewer companies to get funded. Those entrepreneurs that do will have to prove the value of their ideas and their ability to execute them even in a downturn.

For a look at 25 promising startups, flip through this slide show.

Tozzi covers small business for BusinessWeek.com.