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To: H James Morris who wrote (9836)	12/17/2002 5:01:49 PM
From: stockman_scott	Respond to of 89467

VC Funding Falls 60% in 2002 Byte and Switch News Analysis December 17, 2002 Venture Capital investment fell 60 percent this year, but 2002 was still the fourth-highest investment year in the history of venture funding, according to a report published today by Ernst & Young and VentureOne. Close to $19 billion has been invested in more than 2,500 venture capital transactions in the U.S., Europe, and Israel year-to-date. The vast majority of the cash was devoted to supporting existing venture-backed companies, as liquidity opportunities -- through IPOs, mergers, and acquisitions -- grew progressively scarcer, the report says. "The industry has faced several significant challenges, such as the difficult fundraising environment, significantly fewer liquidity opportunities, and the upcoming impact of the Sarbanes-Oxley Act on VC-backed companies," says Gil Forer, global leader of the venture capital advisory group at Ernst & Young. "Previously, certain elements concerning financial reporting could be implemented after the IPO; now it must happen way before, so taking a company public will be more expensive and will take longer," Forer says. Startups will essentially have to implement systems and controls that were not needed before, requiring more capital. "VCs will review their exit strategies and perhaps look more to M&A, but it will be a case-by-case basis. For some, IPO will still be the best way," says Forer. Still, it’s taking longer than anticipated to work through the pool of companies created by the 1999-2000 funding frenzy. "We're still looking at over 11,000 private companies worldwide," says John Gabbert, VP of Worldwide Research at VentureOne. "Roughly 10 percent of those are profitable... Of the remaining pool, some have succeeded in raising additional venture capital, but the majority have scaled back their operations to a level that, while sustainable, will not yield the desired returns for their investors." Unlike the majority of IT investments that spent 2002 wallowing in the mud, storage networking startups have seen a fair bit of action. Close to 30 storage companies completed M&A activity this year. For 2003, storage software startups are expected to scoop up the majority of M&A deals, while the flock of next-generation NAS hardware players will string out the pennies to make it through the year (see Startups: The Next Generation). Bob Grady, managing director at the Carlyle Group, says the fact that there is a lot less money chasing this stream of innovation is good news for investors. Grady refers to a return to "rational" valuations at a median of $10 million -- down from a peak of $26 million in the second quarter of 2000. On a positive note, historically top-quality companies are funded in downturn years. Shining examples include: Cisco Systems Inc. (Nasdaq: CSCO - message board), Apple Computer Inc. (Nasdaq: AAPL - message board), Ciena Corp. (Nasdaq: CIEN - message board), and Genentech. — Jo Maitland, Senior Editor, Byte and Switch byteandswitch.com

To: H James Morris who wrote (9836)	12/20/2002 3:56:56 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Venture Capital: Back to 1990 The coming year will look like 1990, with just 50 funds raising $2.5 billion, or less than 5 percent of what they raised in 2000. But guess what? There won't be a shakeout in venture capital. That said, pity the late-stage companies. By Julie Landry The Red Herring December 16, 2002 Why It Will (Won't) Happen Hold that schadenfreude--2003 won't see scores of venture capital firms closing their doors or returning the piles of cash they're sitting on. The bulk of money raised during the bubble came from strong, established firms, rather than new, weaker ones. These established VC firms existed before the boom and will still be around after the bust. Even struggling firms need only one deal that hits it big to return something--or at least break even--on a fund. Plus, the unwinding of a VC firm happens gradually, if it happens at all. Between 1996 and 2001, the number of VC firms in the United States jumped from 422 to 669. And by design, venture funds are tougher to kill than the Wicked Witch of the West--no amount of cold water will make them melt away. When a new fund is raised, it has seven to ten years to make investments, exit those investments, and distribute the profits to its limited partners (LPs). So, at least in theory, a firm that started in, say, 1999 will be around until 2006. VCs can survive because every firm, no matter how bad, collects a healthy fee to manage its funds--generally around 2 percent of the fund's dollar value. Still, in 2002, at least a dozen top-tier firms, including Atlas Venture; Charles River Ventures; and Mohr, Davidow Ventures, cut the size of their most recent funds, each of which had hovered around $1 billion. They returned several billion dollars in committed capital to LPs and often laid off partners to reflect their consequently lower management fees. But in 2003, don't expect too many other firms to return uncommitted capital, the total of which is estimated to be $100 billion. Instead, look for firms to use this money in lieu of raising additional funds. What It Means The coming year will be tough for startups. Expect the bulk of that $100 billion to be sunk into late-stage companies, spin-offs, and public companies, which these days are often valued as low as any new startup. This is good news for cash-rich VCs. On the cheap they can fund an enterprise that has a much longer track record and is closer to reaching success than an equally valued risky startup. "Until they stop giving away late-stage companies, there won't be a lot of logic to pursuing very early-stage deals," says one early-stage investor who asked to remain anonymous. But late-stage companies won't have it easy either, says Tracy Lefteroff, global managing partner of the VC practice in PricewaterhouseCoopers's Global Technology Industry Group. He says a flood of firms that raised their last rounds in 2000--about 11,800 companies, according to the research firm Venture Economics--will be returning to VCs for new money in 2003. Only those with a very short timeline to profitability stand a chance of raising that next round. So expect a new wave of company closures in 2003. On the Horizon For the most part, then, 2003 will be the year of the tortoise: companies and venture firms will trudge toward the finish line, that elusive liquidity event on the horizon. Slow and steady is fine, especially since there aren't any hares in the race. But by 2004, expect VCs and their LPs to get restless and pick up their feet. Industry observers estimate that 80 percent of the established, well-respected VC firms will be hitting up LPs for capital for new funds in 2004 or 2005. Kelly Williams, a director at the investment bank Credit Suisse First Boston, says she and other managers of funds like hers have been disappointed with the quality of firms raising money in 2001 and 2002, and they look forward to top firms returning to the fund-raising market. VC firms that are seeking their third or later fund are in good shape because they have a prebubble track record by which LPs can assess their odds for positive returns (see "Marking Time"). These new funds will then act as a clean slate for fund-raising, allowing firms more flexibility to invest in early-stage companies. redherring.com