Mark, its been tough for VC's too. Trust me.
>April 29, 2001
Now is the winter of Bill Stensrud's discontent.
Just last year, Stensrud was San Diego's eminent venture capital investor -- master of his domain -- renowned for the bets he placed on startups with breakthrough technologies in the telecommunications equipment industry.
Stensrud's personal fortune was valued once at $750 million, based largely on his prescient investments in GlobeSpan, Paradyne, Juniper Networks and others. Earlier this year, Forbes magazine counted the burly, bearded investor among its 50 "dealmakers with the Midas touch."
"He's probably the best I've ever seen at thinking three, four, five years ahead of the curve," says Craig Andrews, a San Diego lawyer who has worked with Stensrud for years.
But now the guy respected for his ability to see over the horizon is seeing an apocalypse. Stensrud is talking in terms that are chilling -- if not alarming -- to anyone with a passing interest in the telecommunications industry.
"This is the roughest period I've experienced in 30 years," the 50-year-old venture capitalist said in a recent interview. "The last six months have been the worst six months of my life, professionally. There's an enormous amount of stress right now."
To Stensrud, the dramatic sell-off on Wall Street has hit the venture capital business like a "cousin of the asteroid that killed the dinosaurs."
The catastrophic imagery might seem excessive, but Stensrud is not the only venture investor talking that way.
"It is going to be a nuclear winter," says Joanna Rees Gallanter, founder and managing partner of the Venture Strategy Group, a venture firm in San Francisco. Just about every venture fund has felt the impact, and, Stensrud adds, "any venture capitalist who tells you they're doing great is lying."
The reason for such a desolate view is what Stensrud calls "an enormous liquidity crisis in the venture capital business."
Apart from triggering the well-chronicled demise of dot-coms, the market crash also has trapped hundreds of technology-oriented, venture-backed startups in a struggle for survival.
Many of these fledgling companies were founded when the stock market was soaring and corporate America was on a spending spree. Venture firms typically recover their investment when a startup is sold outright to some big corporation or when its stock is sold through an initial public offering, or IPO.
"The assumptions we made at the time about how much money you had to put into a company were based on the norms of what the liquidity options would be in 18 months," Stensrud explains.
But now those options are mostly closed.
Thomson Financial, a firm in Boston that tracks public stock offerings, found that only 26 IPOs have taken place so far this year -- with decidedly mixed outcomes. In comparison, Thomson counted 146 IPOs during the same period last year.
Likewise, corporate buyouts have declined sharply among the four most acquisitive technology companies: Intel, Cisco Systems, Nortel Networks and Lucent.
Of the four, only Intel has been active, making just two deals valued at $1.35 billion so far this year, according to Broadview, an investment banking firm in New Jersey. During the same period last year, Broadview counted 15 deals totaling $11.36 billion.
One startup sector that particularly appears to be in jeopardy is fiber-optic communications networks and equipment. By some estimates, close to 900 optical component and systems makers have been funded in recent years -- yet Vinod Khosla of the Kleiner Perkins venture firm in Menlo Park has predicted that nine out of 10 optical startups will go out of business.
With no exit in sight, hordes of venture-backed companies are running out of cash, and they are returning en masse to venture firms for additional infusions of badly needed funding.
"Many VCs didn't leave enough dry powder in their funds to keep their portfolio companies going," Stensrud says. As a result, venture firms are making very few new investments this year.
Moreover, venture partners like Stensrud have been forced to choose which companies in their portfolio are most deserving of funding -- a process that boils down to making a series of life-or-death decisions straight out of "Sophie's Choice."
"Every venture fund is saying, 'I can't save everything, what am I going to do?'" Stensrud says. "It is like (losing) a kid."
Among the recent casualties in Stensrud's portfolio is ReFlex Communications, a Seattle-based startup founded in 1998 to deliver high-speed Internet connections to apartments and condominiums around the country.
Backed by $69 million from Enterprise Partners, The Sprout Group and others, the company was unable to raise enough additional funding to continue operating. After laying off more than 250 employees, ReFlex filed for Chapter 7 bankruptcy liquidation on March 28, leaving as many as 10,000 Internet customers in 14 cities without services.
"It was a great company, with a great business model and great management," Stensrud says. "But it doesn't matter if you're a great company if you can't raise money. It broke my heart."
In San Diego, a similar funding meltdown at Indiqu, a wireless Web startup, unleashed intense acrimony between company insiders and employees who had not been paid. The fallout was both local and global.
Indiqu got its venture backing from a Finnish communications company, a Dutch investment firm and Kevin Kinsella, a local angel investor.
The cascade of such problems has taxed the resources at many venture firms -- in terms of both money and the time spent by partners on crisis management.
"The last big VC bubble burst was in 1983," Stensrud adds. "But the bubble of '83 was a fender bender in comparison to the train wreck of 2000."
As losses mount among venture firms, Stensrud predicts a number of consequences. Some funds will fail and many, if not most, will encounter greater difficulties in raising money among the pension funds, endowment funds and institutional investors that invest in venture capital funds as limited partners.
"My guess is that the money raised by venture funds this year is going to be 30 percent of what it was last year," Stensrud says.
"If there's any fallout in terms of firms disappearing, we probably won't see that for a couple of years," says Jeanne Metzer, of the National Venture Capital Association in Arlington, Va.
Stensrud acknowledges that the stress has taken a personal toll, although he wouldn't discuss the cost in much detail.
When asked how he's been affected, Stensrud replied by e-mail:
"I have been an insomniac for 50 years, so losing sleep is nothing new. Went through a month of panic and then decided all I could do was work hard and do my best. At some point you have to recognize that a large part of life is out of your control."
Friends say the heavyset Stensrud has been losing weight because he's skipping lunch, although they say he's always been a workaholic.
One colleague says Stensrud is "a guy who sleeps only four hours a night pretty consistently." Another notes, "If I send him an e-mail on a Saturday evening or Sunday morning, I'll get a response back right away."
In the end, the ramifications of venture capital's nuclear winter extend well beyond the fate of individual startups and the venture funds backing them.
By some estimates, Silicon Valley's commercial real estate market will have a 20 percent vacancy by summer, and real estate values have dropped by 40 to 50 percent.
"California's economy is going to be hugely impacted," Stensrud says. "No matter what you think about anything, the energy crisis plus this meltdown in technology is going to create a long hiatus."
If there's a bright spot, it's that the companies and venture firms that come out of this nuclear winter will be stronger -- and they may face far fewer competitors.
Or, as Stensrud put it, after the smoke has cleared, "the dinosaurs will be dead but the small furry animals will emerge." |
