Venture Capitalists Shake Off Chill of Tech Slip, but Slowly
By LISA BRANSTEN
December 17, 2001
Staff Reporter of THE WALL STREET JOURNAL
A bit of the chill may be coming off the venture-capital winter.
So far there's nothing in the data, but there may be something in the air, if firms like August Capital are any measure. The relatively small Menlo Park, Calif., venture-capital shop hadn't invested in any new companies this year until October. But since then, it has put money into four start-ups, and last week it committed funds to a fifth.
"There is a bit more funding going on," says Andy Rappaport, a partner at August Capital. "To the extent that people have been hiding under their desks all year, they're starting to peek out."
Evidence of a thaw is anecdotal at best, and there is no question that there will be more carnage in the venture-capital industry before things get significantly better. But many venture capitalists believe the climate for financing start-ups seems to be improving.
One reason, they point out: The stock market has stabilized, and a stable market is the first step toward a healthier environment for initial public offerings. Also, there have been shreds of good news in the technology industry, such as the announcements from chip makers Intel Corp. and Advanced Micro Devices Inc. earlier this month that they expect sales for the fourth quarter to be better than anticipated. Tech recoveries tend to presage recoveries in venture capital.
The tentative steps back into the investment game don't point to any particular area of promise for venture capitalists. Some are finding software for big companies to be an attractive area, as well as equipment that helps businesses store and manage electronic files.
Of the five new companies August plans to invest in, one is designing semiconductors for data-storage systems and two others are creating software for big companies. The other two are developing components for optical networks, showing that some VCs are still willing to invest in the optical networking sector even though the days of throwing huge sums of money in that area are over.
Last Tuesday, VentureWire, the daily e-mail of new venture deals that has become something of an industry barometer, reported that 19 start-ups had announced raising $187 million that day, compared with the daily average of 11 companies raising $72.5 million for the month of November. "It felt more like December 1999 than December 2001," the newsletter began.
Moreover, chatter at holiday parties hosted by the venture firms is all about doing more deals.
"All of a sudden I've heard in the last week several VCs who are actually excited about investing again," says John Montgomery, co-chairman of the venture-capital practice at law firm Brobeck, Phleger & Harrison. "It's not that there is a ton more activity, but the tenor of the conversations seems to be changing from gloom and doom and misery to more hope and optimism."
Many in the industry believe that improvements in the industry are a delay of a rebound that seemed to be starting just before the Sept. 11 attacks roiled the economy.
"Things were starting to loosen up a little bit as we entered September, and then the attacks sent everything into a tizzy and that does seem to be wearing off," says Flip Gianos, a general partner at InterWest Partners in Menlo Park. He cites his recent experience helping PlaceWare, a company he first invested in in 1997, raise $30 million -- $10 million more than the company was aiming for.
"In the early days of the financing it felt like it was hard -- and then all of a sudden it was oversubscribed and we raised $10 million more than we thought," he says. Investors in the new round put a lower value on the company than when it raised money last year, but even so, it seems that more people are willing to take risks on companies, Mr. Gianos says.
"There are people out there looking for good deals, and the first stage of a rebound is when people are out bargain hunting," he says. "Then as time passes people start to get a little more relaxed, and greed overtakes fear."
The existence of such "bargains" both on more mature start-ups and on companies looking for their first rounds of money is a big reason for the pickup in activity, venture capitalists say.
"A lot of the unrealistic expectations that were in the market have been wrung out," says Jon Bayless, a general partner at Dallas-based Sevin Rosen Funds. That, he says, is leading his firm to take a closer look at more companies.
But with the retreat of a number of corporate players, company-generating "incubators" and smaller venture-capital firms, few expect that there will be a year anytime soon like 2000, when venture capitalists invested $104 billion. In the first three quarters of this year, venture capitalists have put about $31 billion into 2,653 companies, compared with the $82.6 billion they poured into 5,487 companies in the same period last year.
Some observers say the better mood may be nothing more than yet another temporary warm spell for the industry in what may be a long ice age.
"I would imagine that we're going to see up and down roller coasters for six months or more," says Jesse Reyes, a director at Newark, N.J., research firm Venture Economics.
Seedlings
Callidus Software (www.callidussoftware.com) announced that it has raised $14 million in a second closing of the company's sixth round of funding led by Invesco Private Capital. The San Jose, Calif., company sells software that helps companies manage incentive programs such as bonuses for salespeople ... ReefEdge (www.reefedge.com) announced that it has raised $7 million from two venture funds affiliated with telecommunications companies: Ericsson Venture Partners, which is affiliated with Swedish mobile-phone company Ericsson, and Saturn Venture Partners, a fund affiliated with Telecom Italia. The Fort Lee, N.J., company sells software and hardware that help make wireless data networks more secure, and the money comes as a second close on its second round of financing. |
