Again from Barron's, excerpted from a piece on the state of the VC biz...
John
More immediately, the stock market's rout already is having an ugly effect on the earnings of corporate venture capitalists and investment banks that grew too dependent on harvesting venture-capital gains to boost their results in order to meet Wall Street expectations.
Couple the loss of these gains with a precipitous downturn in technology sales or a protracted slowdown in investment banking and trading, and the outcome might even be red ink for some companies in future quarters.
According to the NVCA, corporations have invested $34 billion in seed money for start-up ventures since 1995, and last year accounted for $19 billion of all such investments. For many companies, particularly in the tech sector, venture investments have become a form of research and development.
Yet, while corporate sponsors contributed roughly one-sixth of total VC investments in 2000, they participated in a third of all deals, thus magnifying their overall exposure to potential loss. David Barry, senior editor of Corporate Venturing Report, lists Intel, General Electric, Comdisco and Dell Computer as the top four corporate investors. Intel was involved in 176 deals last year, GE in 95, Comdisco in 57 and Dell in 50. Other top corporate VCs include Cisco Systems, Motorola, Reuters, Siemens and Sun Microsystems.
Most companies do not disclose the details of their private investments, making it difficult to gauge the recent damage to these holdings, or their current worth. But don't expect a full confession anytime soon. Kimber Bascom, a practice fellow at the Financial Accounting Standards Board, the accounting profession's rule-making body, says that FASB guidelines require public companies to recognize changes in the value of private investments "when the change is other than temporary." This standard, says Bascom, is meant to be more stringent than that used to measure "permanent impairment" of assets, and should be followed when the assets are not likely to recover their original cost during the holding period. He notes, however, that there is a fair amount of "wiggle room" in the FASB guidelines, but adds that accountants are responsible for raising valuation issues during corporate audits.
Accordingly, whether and when corporate VCs own up to losses on private investments will vary. Some companies and venture-capital funds recognize impairment of private holdings before a sale or new financing round, but others simply carry investments at book value. What's clear now, however, is that many holdings are distressed, and that a growing portion of new venture-capital money is being used to prop up existing investments.
In 1997 and 1998, the NVCA reports, more than 42% of VC monies flowed into new investments. Last year VC funds, including corporate investors, put just 33% of incoming funds into new ventures; by the fourth quarter new deals accounted for just 25.5% of total commitments.
Chipmaker Intel, one of the first corporate VCs, has a strategic equity portfolio with stakes in more than 550 public and private companies. Though only a handful are public, at yearend 2000 the two portfolios were valued almost evenly, at $1.9 billion in marketable securities and $1.8 billion in non-marketable securities. Intel carries marketable investments at the lower of cost or market value, but generally does not adjust private valuations. A spokesman argues that Intel Capital, the company's investment unit, creates value for shareholders beyond the immediate worth of a given private investment.
As of December 31, the Intel portfolio included approximately $290 million of net unrealized gains on marketable securities. Applying the Nasdaq's 15% year-to-date loss to Intel Capital's marketable securities would wipe out those gains, and then some. Given the rising importance of venture-capital gains to the company's earnings, their expected disappearance could have a pronounced effect on Intel's earnings. Last year, the company realized investment gains of $3.7 billion, equal to a third of reported net income of $10.5 billion. The prior year, portfolio gains accounted for only 12%, or $883 million of reported income.
Some people compare the probable losses hidden inside VC funds and corporate balance sheets to the credit bust of the late 1980s, when many commercial banks and savings and loans were forced to liquidate loans well below book value. If so, coming quarters won't be pretty either for the Wall Street banks that tried, with varying success, to integrate venture-capital investing into their investment banking operations. The goal, of course, was to build a veritable assembly line in which a company's financing needs were controlled from start-up through IPO, generating a succession of fees. Last year J.P. Morgan Chase CEO William Harrison went so far as to call VC investments his bank's main earnings driver, but only a few months later the bank was hit with a $92 million venture-capital loss. |
