Features

Beaten-down venture capitalists hunker down for more trouble

By Michael Liedtke AP Business Writer
Wednesday September 26, 2001

SAN FRANCISCO — Already beaten down by the collapse of the technology industry, venture capitalists are hunkering down for even rougher times ahead as the economy recovers from the devastation of this month’s terrorist attacks. 

While remaining bullish on the industry’s long-term prospects, venture capitalists generally are pessimistic about the outlook through 2002, according to two informal industry surveys taken over the past week. 

Venture capitalists are preparing for “an extremely difficult” environment for the next 12-18 months, said the National Venture Capital Association, an industry trade group that polled 60 major firms across the country last Friday and Monday. 

Most of the 56 firms that responded to a survey by VentureWire — an online news service focused on the industry — also predicted the fallout from the terrorist attacks will slow the money flow to start-ups at least through next year. 

“To say we are in for choppy times is an understatement,” said Jim Breyer, managing partner with Accel Partners in Palo Alto. Breyer predicted the financial fallout from the Sept. 11 tragedy will be even more dramatic than the October 1987 stock market crash, which hurt the venture capital industry for at least three years. 

After furiously raising money last year to finance the buildup of the Internet Economy, venture capitalists still have plenty of money to invest — an estimated $45 billion, according to the National Venture Capital Association. A large chunk likely will be earmarked for previously financed start-ups as venture capitalists scramble to salvage their previous investments. 

“I would not want to be an entrepreneur searching for my first round (of capital) right now,” said Mark Heeson, president of the National Venture Capital Association. “Venture capitalists are going to be a lot tougher even with more seasoned entrepreneurs. It’s just going to be a harsher environment.” 

Venture capitalists “will have to be prepared to support their companies for longer periods of time and recognize that they might not be able to meet their original budgets because this recession is going to make everything more difficult,” said Howard Cox, a general partner with Greylock Financial in Boston. 

Like most of the technology start-ups that they helped fund, venture capitalists were grappling with a sharp contraction in their industry well before the Sept. 11 tragedy. 

As tech stocks have plummeted on Wall Street, venture capitalists have been forced to pour more money into their existing portfolio of companies instead of cashing out in initial public offerings, or IPOs. The shift has saddled venture capitalists with unprecedented losses after reveling in record profits in the late 1990s. 

Before Sept. 11, some venture capitalists had been hoping that the worst was just about over in the tech sector and the window for IPOs might crack open again early next year. 

“This has pretty much splashed cold water on that talk,” said Geoff Yang, a partner at Redpoint Ventures in Menlo Park. 

In many ways, venture capitalists say their duties won’t change much from the past six months. They expect to continue their triage on their existing start-ups while keeping an eye out for promising new ideas. 

“This just is going to elongate the cycle. We already knew things were tough, and this just really puts a hammer in it,” said Wes Raffel, general partner of Advanced Technology Partners in Palo Alto. 

The venture capital downturn already has produced ripple effects beyond the start-ups that depended on the money to stay afloat. Thousands of workers have lost their jobs at well-established technology and media companies that have dismantled expansions undertaken to cash in on new business financed by the venture capital boom. 

Venture-backed companies generated $736 billion in revenue and accounted for 7.4 percent of the nation’s gross domestic product last year, according to WEFA, an economic consulting firm. 

Venture capitalists invested a record $103 billion last year, but are rapidly backpedaling this year. Through the first half of this year, venture capital investments totaled $22.8 billion, a 58 percent decrease from last year’s pace.