Editor’s note: The stock market meltdown and related Wall Street scandals — capped by WorldCom’s seeking of bankruptcy protection on Sunday — is having a domino effect on North Carolina and Georgia technology firms as well as companies associated with them. In a multi-part package beginning today, Local Tech Wire takes a look at the havoc wreaked in recent weeks and what the consequences are for both private and public firms as well as startups hoping someday to play in the private markets. The ongoing rout in the stock market is beginning to gum up the works for the region’s venture capital industry, which can’t exit any previous investments and generate momentum for new deals.

“There’s a good degree of pipeline constipation,” says Frank Dalton of Atlanta-based Cordova Ventures. “The key to our business is putting new deals in at one end and pulling mature companies out at the other, and that just isn’t happening now.”

The Dow Jones Industrial Average just completed its worst two-week run since the October 1987 crash, falling more than 14 percent and barely keeping its head above the 8000 mark – territory is hasn’t seen in almost four years. For the year, the Dow is off 20 percent.

The technology-laden Nasdaq index has fared even worse, dropping 32 percent so far this year, following last year’s 21 percent loss and a 39 percent drop in 2000.

After enduring months of economic sputtering that caused many investors to sit on the sidelines waiting for the nation’s business engine to roar back to life, accounting scandals at WorldCom, Xerox, Enron and elsewhere have eroded public confidence in the engine’s performance and are now sending many of the investors who had remained in the game before scurrying for cover. That, in turn, is putting a damper on the private equity market.

“Everything trickles down,” Dalton says. “There’s no interest in acquiring tech companies, and you can’t even think about an IPO in this market.”

Reluctance to liquidate

As a result, Cordova partners are spending more than three-quarters of their time working with their portfolio companies to help them mature while waiting for a market rebound. They are exerting very little energy on looking for new deals, he says.

“Sometimes, you’re pretty helpless,” he says. “There’s not a whole lot we can do.”

Although Cordova is sitting on a pile of cash in its various investment funds that it can tap to sustain its portfolio, Brent Kulman of Charlotte Angel Partners has an even harder time trying to pull off a deal in the current environment.

“With angel investors, they have to sell something to come up with the money to do a deal, and nobody wants to liquidate in this market,” Kulman says.

But that doesn’t mean that new investments are impossible, he says, noting Charlotte Angels took part in the $6.4 million first-round funding of agriculture biotechnology company Cropsolution this spring and is looking at other deals as well.

“Whether to invest is really of function of opportunities,” he says. “I’m not really concerned with where the Nasdaq is right now because the companies we look at wouldn’t be ready for an exit for five to seven years, and the markets will be in a different cycle then.”

No scoreboard watching

Ed McCarthy of River Cities Capital Funds in Raleigh is another venture capitalist who isn’t scoreboard watching right now. He says the market has always run in cycles and will eventually right itself.

“For a disciplined investor, this is a great time to invest,” he says. “You have to look at the long haul and believe that the market will come back over time. It’s like an omelet – you can wait till it’s done or eat it when it’s runny.”

River Cities is looking at a few new investments in the Southeast, he says, but the unstable market makes it hard to pull off deals because assembling a syndicate of venture firms to invest is tricky. He expects to continue seeing deals, too, even though corporate valuations are far off their highs of a few years ago.

“Entrepreneurs are sort of an irrepressible lot and will continue to forge ahead despite the funding environment,” he says. “There’s no shortage of startups out there. We just need to find the right deals.”

Dalton agrees that there are a few silver linings in the current black-cloud environment. Top talent is easier to attract to young technology companies as major corporations slash staffs, and dealing with adverse markets will hone the skills of managers, he says.

“Out of this perfect storm will come some pretty good survivors,” he says.

Tuesday: What are the startups supposed to do?