Raining Losses: A Tale Of Venture-Capital Pain
By LISA BRANSTEN
Staff Reporter of THE WALL STREET JOURNAL
Some savvy investors who were able to buy shares of start-ups at early, low prices are getting soaked.
For evidence, look no further than Loudcloud Inc. Venture-capital investors who put money into the Web-services company just before it went public were already hurting when Loudcloud sold stock to the public for just $6 apiece in its March initial public offering; the last-venture investors had paid $17.06 for their shares.
Now some of the Sunnyvale, Calif., company's earliest investors, too, have been hit with paper losses. Loudcloud's shares closed at a record low of $1.40 on Tuesday; that is the first time the shares closed below the $1.68 Benchmark Capital, Menlo Park, Calif., paid for most of its stock in the company. Later in the week the share price edged up but Benchmark was underwater again Thursday, when the stock closed at $1.60, down 12 cents, or 7%.
In fact, the only major shareholder still ahead on the Loudcloud investment is its co-founder, Marc Andreessen, also co-founder of Netscape Communications Inc. Mr. Andreessen bought most of his shares for 33 cents but because he, too bought some shares in later rounds, he's just barely above water. His total investment in the company of $10.7 million -- again not including shares he bought on the IPO -- is now valued at about $13.8 million.
Benchmark's woes illustrate how the end of the market boom has blown away conventional wisdom that early investors almost always make money once companies go public because they have put their money in at pennies on the dollar. Typically, early-stage investors' risk comes from technology not working or markets not materializing. It is assumed once they go public they will make money.
Loudcloud Misses Expectations in First Quarter as Public Concern (June 13)
Doing an Internet IPO Now Takes Grit, Loudcloud Finds (April 6)
Loudcloud IPO Soaks Latecomers as It Manages Only a Meager Gain (March 12)
The fact that some venture investors are losing on public companies shows that the stock markets in recent years were more willing to fund less-mature companies that didn't have proven business models. Loudcloud certainly isn't alone in dropping below the value early investors put on the company. On Thursday investors in semiconductor company Transmeta Corp. came close to joining that club as shares in the Santa Clara, Calif., firm fell 57% to $5.36, approaching the split-adjusted $3 a share some venture capitalists paid. It is uncertain what, if any, real losses those investors suffered since they were able to sell at least some of their shares as of last month.
And there are dozens of examples among electronic-commerce companies, even excluding companies such as Pets.com Inc. that went public and then shut down. For example, ImproveNet Inc., Redwood City, Calif., closed at 41 cents a share, well below the $2.52 where early investors bought stock. Telecommunications-gear makers aren't immune either: At 77 cents a share, data-networking equipment company Triton Network Systems Inc., Orlando, Fla., is well below the $2 the first institutional investors paid for its shares and Corvis Corp., Columbia, Md., is trading at $3.52, not far above the $2 a share the company's first venture capitalists paid.
It isn't clear in all of these cases whether the venture capitalists made money on their investments since some would have had time to distribute shares to their investors before the prices got so low.
Jesse Reyes, a director at Newark, N.J., research firm Venture Economics, says such examples of companies trading below their value when they got their first venture money represent just "the tip of the iceberg."
Certainly not all battered stocks have spelled trouble for their venture investors. Jim Breyer, managing partner at Accel Partners in Palo Alto, Calif., says he made a 20-times return on the money he invested in NorthPoint Communications Group Inc., the San Francisco provider of high-speed Internet access that filed for bankruptcy-court protection in January. And Idealab Capital Partners, now called Clearstone Venture Partners, Pasadena, Calif., made hundreds of millions of dollars off of the $2.5 million it put into the now-defunct online-toy seller eToys Inc.
In its early days, Loudcloud was the darling of investors who fought to buy a piece of the company being launched by Mr. Andreessen. And Benchmark remained in the black on its investment even as the value of the stock fell from the split-adjusted range of $20 to $24 (where the company initially hoped to do its IPO), down to the $6-a-share price of its March IPO, which raised $150 million. The $20 million Benchmark put into the company -- not including any additional money that partners invested at the time of the IPO -- now is valued at about $14.7 million.
Though officials wouldn't comment on the company's stock performance, in the past Ben Horowitz, Loudcloud's chief executive, has said he was pleased to have raised the money in the IPO and now is focused on running the company not on watching its stock price.
Loudcloud's declining share price isn't expected to have much short-term impact on the company because it doesn't need to raise anymore money soon. Although the company warned earlier this month that revenue for the fiscal second quarter ending July 31 would be lower than analysts expected, it said losses would be smaller than expected and that it believed it had enough cash on hand to reach break-even.
One reason early-stage investors are feeling pain is that during the heyday of the boom, prices got bid up by competing venture capitalists even on companies that were little more than a few entrepreneurs and a business plan. "In 1999 and 2000 ... they had to be in these companies and they had to be in at any price," said Mr. Reyes of Venture Economics.
The average value investors were willing to place on very early-stage companies had surged to $13.6 million for the third quarter of last year from $6.3 million in 1997, according to data from San Francisco venture-research firm VentureOne.
There is no question that for late-stage investors, those who paid top dollar for pieces of companies on the verge of going public at the height of the boom, the pain is most acute.
Benchmark's paper loss is nothing compared with the hit taken by Loudcloud's later-round investors: The $40.9 million that Capital Group Inc.'s Capital Research & Management Co. invested a year ago has shrunk to $3.8 million; the $20 million Charter Growth Capital -- now called Focus Ventures, Palo Alto, Calif. -- put into the company is valued at about $1.9 million; Amerindo Investment Advisors Inc., New York, put in $12 million that now has a value of $1.1 million and the $10 million that Integral Capital Partners, Menlo Park, and San Francisco's Octane Capital each invested has shrunk to a mere $938,000.
Write to Lisa Bransten at lisa.bransten@wsj.com |
