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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: stockman_scott who wrote (4215)	8/9/2002 3:29:44 AM
From: H James Morris	Read Replies (2) \| Respond to of 89467

Tom Alberg of Madrona Venture Group fame lent $200,000K to Jeff Bezos of Amzn fame before he referred him to Kleiner Perkins. Tom is on the Amzn board and has taken out about $20 million since. Don't tell me a good VC can't make money. If bad news comes in waves, the venture capital industry got soaked this week. Two reports released by the National Venture Capital Association and Venture Economics show some disturbing trends for those who place bets on start-up companies. The first report, released Monday, indicated that venture capitalists actually gave back more money to limited partners -- a whopping $2.7 billion -- than they raised last quarter. That means VCs are still sitting on too much money with too few investment opportunities. The second report, released Wednesday, showed returns that were down 24 percent in the 12-month period that ended March 31. By comparison, Nasdaq posted a slight gain during that period. Given those results, venture capitalists would be better off leaving money in their wallets and waiting for the storm clouds to pass. Some appear to be employing that strategy as such funds as Kirkland-based OVP Venture Partners and Seattle-based Madrona Venture Group haven't made any new investments this year. But for all the bad news, John Taylor doesn't believe all is lost. The vice president of research at the National Venture Capital Association says the industry is simply going through a period of transition, "rightsizing" as he calls it. In other words, VCs are paying the price for all of the mistakes made during the late '90s and early part of 2000. There are still some bumps ahead. But for the most part, Taylor said the industry is getting back to where it should be. "A lot of the venture capitalists are saying that the $20 billion to $30 billion pace that we are on now feels right in terms of the amount of time it takes to do due diligence on deals and put responsible financing together," Taylor said. In 2000, venture capitalists invested $108 billion in 8,404 companies -- a record year. This year it will be more like $25 billion in 3,200 companies. It is a lot easier for VCs to get good annual returns by investing $20 billion to $30 billion rather than investing $100 billion, Taylor said. The public markets can support only so many new public offerings, and with the IPO market in the tank, venture investors are deploying less capital and being more cautious. "One thing we need to watch over the next six months to a year is how much new liquidity is coming into the public markets," he said. "Are the workers of America continuing to put their 401(k) dollars in stock mutual funds? If they are I think that bodes well." But for the next 12 months, Taylor said he does not expect to see a lot of fund raising or a dramatic surge in venture capital returns. "We have had negative returns for several quarters and those factors that are most likely to bring the returns back to positive territory aren't particularly strong right now," he said. "The IPO markets and acquisition markets are still very quiet." Giving back money to limited partners -- a strategy employed by a number of large venture capital firms -- is just one way VCs are trying to cope. Seven firms -- including Accel Partners, Charles River Ventures and Walden International -- gave back $2.7 billion last quarter because they could not find ways to profitably invest the money. That compares with 30 firms that raised $1.8 billion in the quarter. This unusual phenomenon of returning unused capital to limited partners shows just how much things have changed. Two years ago, billion-dollar funds were being announced nearly every other week, creating a massive accumulation of capital that has led to an estimated $90 billion to $100 billion sitting in the coffers of VCs. In fact, the recent report from the NVCA and Venture Economics prompted a wave of media coverage with MSNBC declaring "Venture Firms Have Too Much Capital" and The Washington Post running an Associated Press story under the headline "Venture Capital Refunds Surpass Fund-Raising Efforts." Seattle, which never saw the billion-dollar megafunds of Silicon Valley or Boston, has not experienced this trend firsthand. But a shrinking pool of venture capital deals along with slumping venture returns brings its own set of challenges to the smaller funds of the Pacific Northwest. Particularly troublesome are the number of Seattle venture funds that were formed in the past two years whose portfolios are polluted with poorly performing Internet and software companies. Most of the venture funds that hold these start-ups are struggling with double-digit losses and dwindling supplies of capital. That combination could cause a significant shakeout in coming years. Despite the 24 percent drop in venture capital returns and the surge in refunds recently, the industry does have one thing going its way. Venture capital has performed well historically, producing positive returns of 41 percent over three years and 26 percent over 10 years. Getting back to those levels is something every Seattle venture capitalist will be thinking about on their summer vacations. After all, it will be necessary for their survival. seattlepi.nwsource.com