...'Stream of IPOs could subside'...FYI...
Havoc forces VCs to be more selective
BY SHAWN NEIDORF
Mercury News Staff Writer
Posted at 9:46 p.m. PDT Tuesday, April 4, 2000
<<Nasdaq's recent slide and its mid-day plunge Tuesday could shut the window for IPOs if the market continues its roller coaster ride.
For now, Silicon Valley venture capitalists are staying calm, though concerned, waiting for the return of more IPO-friendly equilibrium.
``I think that we will continue to see some volatility, but my hope is that some of the speculation has been washed out of the market,' said Jos Henkens, a general partner at Advanced Technology Ventures in Palo Alto.
VCs have ridden public market ebullience to high returns through most of the 1990s, and those profits have allowed them to raise increasingly larger pools of capital -- $46.6 billion last year -- which venture capitalists have invested in new companies.
Eye-popping returns
As of Sept. 30, the average one-year return for venture capital was 62.5 percent, according to Venture Economics, a Newark, N.J., venture capital data collector. Jesse Reyes, vice president of Venture Economics, estimated the average 1999 return could exceed 100 percent once it's calculated. By contrast, the average VC return was 18.1 percent in 1998, when the IPO market was much leaner.
As Grant Heidrich, a partner at Menlo Park's Mayfield Fund puts it, venture capitalists have been taking companies public in a ``very forgiving and generous environment,' and Nasdaq's gyrations may bring a greater measure of ``thoughtfulness.'
Last week, Palo Alto venture capitalist Cliff Higgerson was visiting with 11 investors, seeking their capital for a new fund.
Their conversation turned to the public market, and both the fund manager and his backers agreed that of the good, young companies in the public market, probably some 80 percent to 90 percent were overvalued. And of the not-so-good young companies, they figured 98 percent were overvalued, said Higgerson, a general partner at ComVentures.
Everyone assumed it would be just a matter of time until the valuations snapped, and Higgerson said Tuesday that perhaps this is the time, reflected in the Nasdaq tumult of late. The index has been sliding since March 10, and Tuesday saw a wild dip of more than 500 points, then a rebound until it closed down 74.79.
Plan B, as in bear
If this is the start of a lasting downturn, Higgerson isn't worried. It would mean marginal companies won't get funded, and some venture capital fund backers likely will leave the market, but ``venture capital will go on just fine, thank you.'
Indeed, venture capitalists would be both hurt and helped by a prolonged stock-market decline. The companies in venture portfolios that are ready to go public or be acquired would be less valuable. On the other hand, a dampened public market would lower the values of young, private companies, and that would cut the price venture capitalists pay for the shares they take when they invest in new companies.
Eventually, a bear market of several years would hurt venture capitalists by dragging down returns.
ATV's Henkens remembers when an information technology company was expected to have three profitable quarters before going public. These days, companies go public with no profits -- some without even having revenues.
That means the risk venture capitalists used to help wring out of companies before taking them public is being passed on to the public instead.
Are the companies pulled by the public markets onto the exchanges, or are they pushed onto the exchanges by eager company managers and venture backers? Probably both, observers say.
At least until recently, the public has gobbled up information technology stocks, and that helped lure more companies into IPOs.
Going public and having a high-flying stock is seen as a ``weapon' by the companies, said Ned Zachar, a director of research at Thomas Weisel Partners, a San Francisco investment bank. Going public brings name recognition with investors and also helps with branding efforts. Going public also gives young companies tradable stock with which to buy other companies to ramp up growth.
But in an extended down market, VCs expect investment bankers will raise their standards for taking companies public.
``I think it's going to raise the hurdle a little bit,' Reyes said.>> |
