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Tech-crash hangover prolonged byhanging on by their fingertips 

SAN FRANCISCO – As they nurse a horrendous high-tech hangover, venture capitalists are getting a sick feeling that more pain is on the way. 

Their foreboding stems largely from the glut of startups still remaining from the dot-com frenzy that venture capitalists fueled during the late 1990s and the first half of 2000. 

While hundreds of startups have folded since the end of 1999, thousands more are hanging on, desperately trying to preserve their money in hopes of a high-tech industry rebound. 

And with the chances of a tech recovery this year dimming, people in the business expect dozens of unprofitable startups to fail during the next six months — a phenomenon that would force venture capitalists to recognize even more losses on their books. 

“You can just look at the numbers and see that another day of reckoning is coming,” said Peter Barris, managing general partner of New Enterprise Associates, a venture capital firm in Reston, Va. “We are going to have to go through another painful trough.” 

Things already look pretty bad. In 2001, the value of venture capital funds fell by an average of 27.8 percent, marking the first annual loss recognized in any calendar year since the industry began tracking its returns in 1980. 

Though they still have an estimated $40 billion to $60 billion sitting idle in their funds, skittish venture capitalists invested just $5.1 billion in this year’s first quarter, a 53 percent drop from a year ago, according to VentureOne, an industry research firm. 

The investment activity has declined in every quarter since peaking at $26.9 billion during the first three months of 2000, VentureOne said. 

Venture capitalists raised just $2.25 billion during the first quarter, the slowest pace since 1995. By some industry estimates, refunds to investment partners exceeded the amount of new money raised. 

The grim conditions produced some dire predictions at a prominent industry conference in June in San Francisco. 

Venture capitalists attending the International Business Forum said they are bracing for a traumatic contraction that will wipe out up to half of the nation’s roughly 800 venture capital firms in the next few years. 

Some said another wave of failed investments could push their five-year and 10-year returns into the red, a possibility that seemed unfathomable in the boom years. 

As of Dec. 31, the industry’s average five-year return still stood at a respectable 35.9 percent while the average 10-year return was 26.4 percent, according to statistics compiled by Thomson Financial/Venture Economics. 

Some of those returns may be artificially high because a significant number of venture capitalists still haven’t faced up to the grim conditions by discounting the values of investments in failing startups. 

For example, the privately held stock of a startup once worth $8 per share has been marked down to $3.75 per share by Kline Hawkes & Co., said Frank R. Kline, the Los Angeles venture capital firm’s managing partner. But another investor still values the company at $6.75, hoping for a turnaround. Kline wouldn’t identify the startup or other investor. 

The shakeout may take two to four years. 

“The industry has moved from a recessed state to a state of depression,” said Edwin M. Kania Jr., managing general partner of OneLiberty Ventures in Cambridge, Mass. “We are in an existential crisis where venture capitalists are asking, ’What is our purpose?’ Why am I here?”’ 

Venture capitalists admit they mostly have themselves to blame. 

After never investing more than $20 billion in a single year during the industry’s first 50 years of existence, venture capitalists poured $141 billion into startups during 1999 and 2000, according to VentureOne. 

Some of that money went to more mature privately held companies, but $89.5 billion funded 4,383 startups, mostly in high-tech industries, during 1999 and 2000, VentureOne said. 

Slightly more than one-fourth — 1,248 companies — either went public, were acquired or went out of business, according to VentureOne. 

That means 3,135 of the startups created at the height of the Internet bubble are still around, hoping to either begin making money on their own or persuade venture capitalists to invest in them again. 

Only a handful are likely to survive, according to venture capitalists, industry analysts and turnaround specialists working with troubled startups. 

“I’m still seeing some companies out there that should have been put to rest a year ago,” said John Zipp, a senior director for SageGroup Strategies, a turnaround consulting company. “They have been hoarding their cash and now it’s starting to run out.” 

Companies that have finally given up in the last few weeks include Personic, a Brisbane maker of online software for job recruitment that abruptly shut down in early June after burning through $76 million in venture capital. 

Other recent flops include Sanrise of Dublin, Calif., a data storage company that burned through much of its $305 million in venture capital before filing for bankruptcy protection on June 12. 

The big push for follow-up investments is likely to occur in six to nine months, predicted Susan A. Mason, a general partner with Onset Ventures in Menlo Park. 

Few, if any, of these startups will be able to raise money in the public markets, given Wall Street’s disdain for the initial public offerings of unproven high-tech companies. 

These cash-starved startups, Barris said, also are likely to be spurned by chastened venture capitalists who now realize “we invested in a lot more companies than deserved to be alive.”