Ranks Get Slim at VC Firms, But This Slowdown Is Unique
By BOB SECHLER
Dow Jones Newswires
December 12, 2001
AUSTIN, Texas -- Bob Fabbio, a 44-year-old managing director in TL Ventures office here, announced in November that he's leaving his post to become chief executive of start-up VIEO Inc., saying the opportunity was too great to pass up.
In Silicon Valley, 32-year-old Josh Becker reached a similar decision a couple of months earlier, opting to give up his associate's position at Redpoint Ventures to become corporate development director at Agile Software Corp.
Both men had been carving out solid careers with established venture firms, and both made their choices voluntarily to pursue personal interests. But they're also among those on the vanguard of what many industry observers expect will be a substantial thinning of the ranks of venture capitalists in coming years.
"You hear a lot about people [in the VC industry] taking a look at what the prospects are for the future," said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers' venture-capital practice.
The reasons for this exodus are many. The fun is gone from the business. There are operational challenges at portfolio companies that make an executive position there more compelling.
In many cases, it's simply economics: Ranks swelled at firms in the boom times and now have to be cut in this more challenging environment. The number of venture capitalists has soared, reaching 8,313 professionals employed at 693 VC firms by the end of last year, according to the latest figures from the National Venture Capital Association. That's more than double the 3,996 venture capitalists employed at 438 firms in 1996, before the emergence of the dot-com bubble and before "IPO" became a household term.
Venture investments skyrocketed over that time, hitting a record $90.5 billion last year from $9.8 billion in 1996, PricewaterhouseCoopers' statistics show.
But the subsequent downturn in the public markets and the overall souring of the economy have rocked the venture industry, with VC investments in the third quarter this year off 70% from the year-ago period. PricewaterhouseCoopers expects full-year 2001 VC investments to come in at about $30 billion, barely a third of last year's total and about 35% below the $46.9 billion invested in 1999.
The falloff may not be terribly significant if it turns out to be a mere short-term blip on an otherwise continuous upward spiral. But most industry observers consider the real anomaly to be the overheated investment environment of 1999 and 2000, which corresponds to the huge runup in VC employment.
"The industry just couldn't sustain that many people," said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire. "The number of venture-capital investments is going down, and certainly that means [VC firms] need less people to do the work."
To be sure, no one expects the venture-capital industry to retreat from its position as a major engine of economic growth. But with venture investments forecast to stabilize between 1998's $17.5 billion total and 1999's $46.9 billion -- when about 5,060 and 6,400 venture professionals worked in the industry, respectively -- there appears to be little doubt that some degree of shakeout is in the cards.
"The VC industry will shrink [in terms of firms and employment], just because there are some funds that aren't getting funded and some funds that are in trouble," said Mr. Fabbio.
Mr. Fabbio, a longtime entrepreneur, said his own decision to step down as a TL managing director was fueled by the opportunity at VIEO, a TL portfolio company. He also plans to keep a hand in the venture industry by continuing as a strategic advisor to his former firm.
"It's still a desirable profession where you can make a lot of money," Mr. Fabbio said. "It's a great time to be a buyer, meaning the prices of these deals are back to what they used to be."
Mr. Fabbio and some others say the anticipated industry contraction will materialize primarily among newer venture firms that tap out existing funds and lack the track records to raise more, aside from those venture capitalists who simply opt to do something else out of personal considerations.
Ms. Lefteroff said the phenomenon "is really just starting" because many first-time funds are only now running dry. In addition, a venture firm could exist for years without making any new investments but without formally shutting down, as its partners engage in activities such as serving on start-up boards.
Other factors may blunt the trend as well, including the huge amount of VC dollars raised but not yet invested -- a figure pegged at $45 billion by some estimates -- and the fact that VC firms have been stretched to their limits in recent years.
"The time demands of VCs have been greater than ever," said Jeanne Metzger, a spokeswoman for the National Venture Capital Association. "A record number of companies has been funded in the last three years, and up until this time there has been a [VC] labor shortage" to oversee those investments.
Ms. Metzger expects "some consolidation of the industry over the next couple years," but she thinks VC employment will stabilize at a relatively high level, albeit below the 2000 figures.
Mr. Becker, formerly of Redpoint Ventures and a 1999 Stanford University alumnus, concurred. He said it's likely that VC employment will fall somewhat overall, but he thinks it will be limited to the less-established firms. He doesn't expect to see any broad exodus of his peers from the industry.
"The pace had definitely slowed down" prior to his leaving Redpoint in September, "but to some extent that was actually enjoyable," Mr. Becker said. "I was confident that even in a downturn, where fewer funds were going to flow into venture capital, that Redpoint was going to be able to raise whatever money it wanted to" because of its solid track record.
He said he left Redpoint because of the opportunity to gain executive experience at an up-and-coming public company. "For me, it was pretty straightforward," Mr. Becker said. "It was just the opportunity here at Agile."
Still, such decisions are expected to become increasingly commonplace in the industry, even as the personal circumstances of people such as Messrs. Becker and Fabbio are unique. Many industry observers say simple logic, combined with the industry statistics, dictates that VC employment will come down.
Already, Mr. Sohl said he's received numerous calls from people within the VC industry who are networking for potential job leads.
"Fund-raising is tough and everything is going down," Mr. Sohl said. VC firms "are obviously not going to need as many people."
Kirk Walden, PricewaterhouseCoopers' national director of VC research, agreed. But he said the public shouldn't look for any formal announcements or press releases as the industry begins its contraction.
"This isn't like a layoff at Hewlett-Packard," Mr. Walden said. "These people just sort of fade into the night and start doing something else. But they're not venture capitalists any more." |
