Jeff Bussgang, a Partner at Flybridge Capital Partners (and former co-founder of Upromise), wrote an interesting post about the thought process that many people in the venture community are going through right now regarding the level of reserves necessary to support existing investments.
The post highlights that the amount of capital in each fund is a definitive sum though the application of the dollars is shifting. It's simple math, if the capital held in reserve to support existing portfolio companies are greater than forecast, you make less investments....or change your model and invest lesser dollars in the same amount of companies. Given the uncertainty of add-on financing many firms are opting for the fewer investment perspective.
Recession usually means that company revenues will grow slower than planned and reducing expenses is usually less than half the equation to having a self-sustaining company. Critically, slowing spending usually means deferring the growth that leads to timely exits. The combination of slow growth and deferred exit translates to more capital required to support an existing portfolio, and less new investments.
Longer term, deferred exits will slow VC fund raising, cause more 'annex funds' to be raised to support companies in a capital starved environment and shift funding from 'A and B' rounds to later stage opportunities where the magnitude of capital required is more certain.
As this perspective seems to be emerging as the current 'wisdom of the crowd' in the VC community, it's also probably a recipe for great opportunistic early stage investors who should see great deal flow and pragmatic terms.