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Non-Tech : Tulipomania Blowoff Contest: Why and When will it end? -- Ignore unavailable to you. Want to Upgrade?

To: 10K a day who wrote (1833)	8/9/1999 11:22:00 PM
From: Sir Auric Goldfinger	Read Replies (2) \| Respond to of 3543

Many Venture Capitalists Cheer Rapid Plunge in Internet Stocks By KARA SWISHER and LISA BRANSTEN Looking for a silver lining in the plunge in Internet stocks? Come to Silicon Valley and talk to the venture capitalists who put up money for Web start-ups. For many of them, the downturn simply means the possibility of cheaper prices for shares in the companies they're looking to invest in. Once, venture capitalists could buy from 30% to 40% of a small company for about $5 million to $8 million. But since the beginning of the year, the surging stock prices have hugely inflated the price tags on start-ups, especially in the later rounds of private funding. The result: increased risk for VCs, especially if they can't generate colossal returns for investors used to bigger and bigger yields. "The small companies have had a lot of people willing to invest without any attention to valuation since returns have been so gigantic, and that makes for bad investment decisions," said Roger McNamee of Integral Capital Partners, who has been a vocal critic of overfunding nascent companies. "I think a lot of people would love to see the herd get thinned -- without causing extinction, of course." Every venture capitalist has his favorite example of how out-of-control the values of start-ups were getting as Web stocks surged. At a conference last month, Jim Breyer of Accel Partners shook his head at the thought of $50 million to $60 million in new investments going to each of several competing Web companies that sell pet supplies online. "I think it is just crazy," he said. Robert Kagle of Benchmark Capital fretted about a huge $25 million first round that bought less than a 40% stake in Google, a year-old Internet-search company. The infant business, competing in an already crowded field, previously garnered only about $1 million in seed money. 'Like Inherited Wealth' "It's like inherited wealth," said Mr. Kagle. "Small companies can start to spend indiscriminately and they quickly pick up bad habits that are hard to correct later." Benchmark became a Silicon Valley legend last year when it invested $5 million in Internet auctioneer eBay Inc. that turned into a $4 billion stake. After that and a number of other such home runs for VCs, a lot of start-ups wanted exorbitant prices for the stakes they were offering Benchmark. "We walked away from some deals that we now regret because we could not believe the prices," Mr. Kagle said. "The problem is there are some really sound business plans that could really change their industries encased in incredibly surreal financing." Some entrepreneurs, such as Sergey Brin, president of Google, disagree. He said the giant first round the company got from two of Silicon Valley's best-known firms, Sequoia Capital and Kleiner Perkins Caufield & Byers was not the point. The money, "was not as important for us as getting the right people involved," he said. He contends that venture capitalists who have been more conservative have not benefited from the boom in Internet companies. Many big venture firms are now getting ready for a another big shopping spree, with a gusher of cash to play with. Last Thursday, the day Internet stocks dragged the Nasdaq Composite Index into an official correction, Softbank Technology Ventures, an affiliate of Softbank Corp. of Japan, said it raised $600 million for its latest investment fund to be aimed mostly at Internet ventures. And Accel, based in Palo Alto, Calif., late last month announced a $500 million fund that will invest in the technology sector that took only two weeks to raise. It had attracted $1 billion in commitments, said Mr. Breyer, allowing the firm to choose its investors carefully. "We even told them not to expect the returns of well over 100% that we have delivered in the past, because we didn't feel that those returns were sustainable," said Mr. Breyer, whose hit investments have included Internet multimedia software maker RealNetworks Inc. "But people still are very interested in getting into this sector in any way they can." VC firms have had such spectacular returns over the past few years, they can weather a short slide. "It's incredible that if you sell a company off for $100 million that's considered a loser," said Mr. Kagle. Frank Quattrone, head of the Credit Suisse First Boston technology group, said it is natural for valuations to come down as the number of public Internet companies grows. "Everyone wanted to own the category, but there were very few ways to play it, so people said we're going to buy them all," he said. "Now the supply is catching up and there have been tons of vehicles for investing to play this trend, so it's time to figure out which of these players are going to be franchise players and which are going to be laggards." Integral Partners' Mr. McNamee said he hopes the downturn will help everyone sober up a bit from the nonstop party that has characterized the Internet investment sector." It will take a sustained period of public market disintegration to really stop the investing, which I think unlikely," he said. "But this may make people focus on building real businesses, because it has been easy to confuse the bull market with brains."