IP: Venture Capital, Withering and Dying

[David Farber <dave () farber net>]

> From: Dewayne Hendricks <dewayne () warpspeed com>
>
> > From: Mike Cheponis <mac () Wireless Com>
> > To: Dewayne Hendricks <dewayne () warpspeed com>
> > Subject: VC: sucking
> > Date: Sat, 20 Oct 2001 23:26:06 -0700
> > MIME-Version: 1.0
> >
> >                   Venture Capital, Withering and Dying
> >
> > By AMY CORTESE
> > October 21, 2001
> >
> > <http://www.nytimes.com/2001/10/21/business/yourmoney/21VENT.html?pagewanted=print>
> >
> > RICHARD THOMPSON and Larry Braitman made a fortune on Flycast 
> > Communications, an Internet advertising services company they founded in 
> > San Francisco in 1996 and sold about three years later to CMGI 
> > (news/quote) for $689 million.
> >
> > It was a classic tale of success in the Internet age, and the two men 
> > decided - in the peculiar vernacular of the Web - to leverage their 
> > success at starting Flycast by creating a venture capital firm to finance 
> > other new technology businesses.
> >
> > Just as the 20th century gave way to the 21st, they opened Signia 
> > Ventures on the fifth floor of a midrise office building in San Mateo, 
> > Calif. Mr. Thompson, 47, and Mr. Braitman, 43, put up $50 million of the 
> > money they received for Flycast and started to pour it into new companies.
> >
> > Now, less than two years after opening, Signia Ventures' office is 
> > closed, its Web site blank and its phones unanswered. Mr. Thompson said 
> > he and Mr. Braitman had decided not to raise money from outside investors 
> > or invest in new deals until the market comes back, maybe next year.
> >
> > As Mr. Thompson and Mr. Braitman symbolized the Internet boom of the 
> > 1990's, so they also came to illustrate the venture- capital bust that 
> > has rattled investors from the Bay Area to Boston - a bust that is 
> > hurting even venerable firms like Kleiner, Perkins, Caufield & Beyer.
> >
> > During the Internet bubble, dozens of speculators started to compete with 
> > established venture capitalists, using cash raised from rich people and 
> > big institutions to finance Internet start-ups or small biotechnology 
> > companies - then hitting jackpot after jackpot by selling stock in those 
> > companies to insatiable investors.
> >
> > Ted Dintersmith, a general partner at Charles River Ventures, a 
> > 30-year-old firm in Waltham, Mass., compared it to a baseball game where 
> > "suddenly they moved the fences in to 125 feet" from 330 or more. "There 
> > were a lot of pop-ups that suddenly were home runs," he said.
> >
> > Today, the fences that venture capitalists are swinging for might as well 
> > be 550 feet away. With some market indexes off 50 percent or more and 
> > with uncertainty growing after the terrorist attacks on Sept. 11, 
> > investors have become much more discriminating. That has made it nearly 
> > impossible for venture capitalists to use the stock market to cash out of 
> > their speculative investments. So far this year, 29 venture-backed 
> > companies have tried initial offerings, compared with 252 in 2000. There 
> > are also fewer mergers and acquisitions.
> >
> > As a result, many venture-capital newcomers have sharply reduced their 
> > investments, closed offices or shut down. Even Kleiner, Perkins, based in 
> > Menlo Park, Calif., and other established firms have slowed the pace of 
> > their investments after watching an unusual number of their companies go 
> > bust in the last two years. "There's not a lot of good news today in the 
> > venture business," said James W. Breyer, managing partner at Accel 
> > Partners in Palo Alto, Calif.
> >
> > VENTURE capitalists, once the celebrated rainmakers of the new economy, 
> > now seem adrift. Elbow deep in troubled deals, they are pruning their 
> > portfolios, closing companies whose prospects are dim and concentrating 
> > instead on the handful that they think can survive a long downturn. The 
> > few investments they are making are usually in traditional software and 
> > health care.
> >
> > In turn, the innovative technology sector, which had been the engine of 
> > growth, has been throttled back, and many promising but risky companies 
> > are either dying from lack of cash or hibernating until the market 
> > recovers. That is not good news for the economy. Last year, companies 
> > financed with venture capital since the 1970's accounted for 5.9 percent 
> > of the jobs in the United States and 13.1 percent of economic output, 
> > according to a study to be released tomorrow by the National Venture 
> > Capital Association, a trade group.
> >
> > Venture capitalists point out that their business is cyclical and that 
> > they have been through down cycles before, as when a boom fueled by 
> > personal computer makers and suppliers limped to a halt in the late 
> > 1980's. But at the peak of the PC boom in mid-1983, venture capital under 
> > management was just $10.8 billion. Now, more than $200 billion is under 
> > management, so a downturn's magnitude is much greater - and the 
> > reverberations felt more widely.
> >
> > Venture capital investors themselves - entrepreneurs like Jim Clark and 
> > Michael Dell and athletes like Wayne Gretzky and Andre Agassi, not to 
> > mention pension funds and endowments - are seeing their capital shrink 
> > and their profit distributions dry up. Cash and stock payouts from these 
> > funds fell more than 80 percent in the first six months of the year, 
> > compared with the same period of 2000, according to Venture Economics, a 
> > firm that tracks venture capital.
> >
> > As their returns shrivel, limited partners are growing disenchanted with 
> > what some call excessive management fees. Ominously, they are sometimes 
> > balking at their commitments to put more money into funds.
> >
> > Venture capital funds lost 18.2 percent, on average, for the 12 months 
> > ended June 30, according to Venture Economics, while Internet-specific 
> > funds were down 27.7 percent. The triple-digit returns, on paper at 
> > least, that venture capitalists were promoting as recently as last year 
> > have melted away. "Everyone in this industry is hurting big time," said 
> > Tom Crotty, a partner at Battery Ventures in Wellesley, Mass.
> >
> > That is especially true of the newcomers - the investment bankers, 
> > corporations and entrepreneurs who jumped into the venture business when 
> > it was hot. Signia Ventures was hardly alone in closing: Octane Capital 
> > Management, a venture firm in San Francisco started in 1999, decided in 
> > April to close and to give back to investors what was left of the $265 
> > million they had entrusted to the firm - about half their initial stakes. 
> > Primedia (news/quote), a magazine publisher based in New York, shut down 
> > its venture arm in early October. And Veracity Capital Partners - a firm 
> > started in January by professionals at Battery and BCI Partners, a 
> > private-equity firm in Teaneck, N.J. - disbanded after a few months when 
> > the founders realized that they would never raise $250 million.
> >
> > "We were sick of banging our heads against the wall," said Mark Hastings, 
> > a co-founder of Veracity, who remains a partner at BCI.
> >
> > Even the established firms have not been spared.
> >
> > "Everyone has bad deals," said Bud Colligan, who founded the software 
> > maker Macromedia (news/quote) and is now a partner at Accel Partners, an 
> > 18-year-old venture firm. "The question is: Do you have 50 percent bad 
> > deals or 90 percent?" Mr. Colligan and Mitch Kapor, another Accel 
> > partner, recently decided to stop investing in new companies and to focus 
> > on their existing portfolio.
> >
> > Most vulnerable are funds that were raised and invested at the height of 
> > the bubble, in 1999 and 2000, when 70 percent of all high- technology 
> > venture capital for the last two decades was invested. The competition 
> > for deals was so fierce that venture capitalists virtually threw money at 
> > start- ups, many of which had no clear plan for making money. Some 
> > venture capitalists also invested large amounts in companies that were 
> > about to sell stock, in hopes of quick profits when the stocks started 
> > trading; that aggressive strategy cost them dearly when investors turned 
> > their backs on such shares.
> >
> > That is not to say that all venture investments made in the last few 
> > years were bad. It is still too early to calculate performance in such 
> > young funds, and one big hit could more than compensate for many duds. 
> > But the sheer volume of deals and the high valuations at which they were 
> > made all but assure that the crop of venture capital funds invested in 
> > the last few years will be among the worst-performing ever.
> >
> > "Money invested in 1999 and 2000 is not going to do very well," said 
> > Clint Harris, a managing partner at Grove Street Advisors, which makes 
> > venture capital investments for the California Public Employees' 
> > Retirement System, called Calpers.
> >
> > Funds started at that time are not all that are at risk. So are the firms 
> > created in those years to ride the momentum. One firm that epitomizes 
> > bubble investing is Technology Crossover Ventures, created in 1995 to 
> > capitalize on the investment opportunities of the Internet. A news 
> > release dated April 4, 2000, just days before the bubble burst, announced 
> > TCV IV, a $1.6 billion fund that, the release said, was "the largest-ever 
> > fund for Internet investing."
>
> <snip>


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