Venture capitalists sustained 27.8 percent loss in 2001

By Michael Liedtke The Associated Press
Tuesday June 11, 2002

SAN FRANCISCO – After escaping serious damage in the early stages of the high-tech wreck, venture capitalists suffered even deeper financial wounds than stock market investors last year, according to industry figures released Monday. 

Venture capital funds plunged by an average of 27.8 percent in 2001, a gruesome about-face from the prior year when the average fund gained 28.6 percent, according to statistics complied by Thomson Financial/Venture Economics for the National Venture Capital Association, an industry trade group. 

It marked the industry’s first calendar-year loss since the trade group began tracking fund returns in 1980. Before 2001, venture capitalists’ worst single-year performance came in 1984 when the average fund inched up by 1.3 percent. 

The venture capital community’s setback was even more severe than the Nasdaq composite index, the most popular benchmark for measuring the performance of publicly held tech stocks. The Nasdaq index fell by 21 percent during 2001, coming off a 39 percent loss in 2000. 

The Nasdaq’s prolonged funk has contributed to the dramatic deterioration in venture capital portfolios. 

With the stock market discounting the shares of technology industry giants such as Cisco Systems and Sun Microsystems, venture capitalists are being forced to face up to the grim conditions and mark down the value of their holdings in industry startups. 

Some venture capitalists say they already have made most, if not all, of the painful adjustments to their portfolios. Many other venture capitalists, though, still haven’t fully recognized their losses on their books, something they likely will have to do soon unless the industry stages a surprising turnaround. 

That means venture capitalists likely will be showing losses through at least the end of next year and maybe even beyond, according to industry analysts and professionals. 

“The next two to four years are going to be tough sledding,” said San Francisco venture capitalist Chip Adams, a principal at Rosewood Capital. 

Last year ended with the industry’s fifth consecutive quarterly loss, dating back to late 2000. 

The average decline of 3.9 percent during the final three months of 2001 marked an improvement from a third quarter loss of 10 percent, but “that should not be seen as a sign of recovery,” warned Jeanne Metzger, a spokeswoman for the industry trade group. “We are not out of the woods yet.” 

The recent losses represent a sobering comedown for venture capitalists after registering a mind-boggling 167 percent gain in 1999, near the height of the dot-com boom. By comparison, the Nasdaq index surged by 86 percent in 1999. 

With the losses from the dot-com bust now piling up, some institutional investors want to cash out of struggling venture capital funds. But most venture capitalists say their investors are sitting tight and betting that the funds will deliver better long-term returns than the stock or bond markets. 

Despite the deep losses of 2001, venture capital funds posted an average gain of 49.3 percent over the past three years and an average increase of 35.9 percent over the past five years, according to Venture Economics. 

“Most institutional investors are used to weathering a storm like this,” said Philip Sanderson, general partner of WaldenVC. “If you think in terms of ’buy low, sell high,’ there has never been a better time to be investing venture capital.”