From: Adam Rifkin -4K (adam@XeNT.ics.uci.edu)
Date: Tue Apr 25 2000 - 19:36:05 PDT
Too much money chasing not enough good ideas:
> There are only so many people with the technical talents to start the
> next wave of Internet infrastructure companies. The firms that can't
> land these deals will be in trouble. And those with huge piles of cash
> may feel some pressure to use it anyway.
Over three billion in new VC funds *just* *this* *week*. There go your
pension funds, your 401k's, and your IRAs...
> April 24, 2000
> Can't Stop the Startup Funding
> Venture capitalists say there's too much money chasing too few good
> deals. So why are they setting up even more funds?
> By Jonathan Rabinovitz
> Venture capitalists responded to April's Net stock turmoil with
> declarations of sobriety: No more investing in froth. No more half-baked
> companies going public. No more money for startups without profits in
> sight. Due diligence, they said, was back. It made so much sense it
> couldn't possibly last.
> Last week, following the worst week on record for Internet stocks, the
> VC industry raised at least $3 billion in huge new funds and saw firms
> add more partners. Despite fears of too many online retailing and
> health-content plays, WineShopper.com received a $30 million investment
> while AmericasDoctor.com got $34 million.
> Although some VCs say they have slowed things down and that startups are
> accepting lower valuations, the race to finance Net companies is growing
> more crowded even as the number of promising startups is likely to shrink.
> The pressure is mounting to get a piece of the action in this
> increasingly competitive field. It's a battle that sets the stage for a
> shakeout in the VC business -- a potential shift from the last few years,
> when it was almost impossible for a venture fund to log negative returns.
> "People have forgotten that historically a lot of venture capital firms
> lose money," says Jesse Reyes, VP of research firm Venture Economics.
> "The last few years of triple-digit returns were an aberration."
> Reyes says he was stunned to hear a VC recently tell a college class
> that his firm had perfected its financing process, guaranteeing all its
> investments to be home runs.
> A severe imbalance has emerged between the supply of solid Internet
> companies and the venture capitalists' demand for deals, according to
> Kirk Walden, research director of the Money Tree,
> PricewaterhouseCoopers' venture capital survey. While the boom in
> e-commerce drove the number of venture-financed deals to more than 4,000
> in 1999 from about 2,800 in 1998, he says the recent market volatility
> and the decline in IPOs will make it difficult to sustain that level.
> "With the huge amount of capital out there, the good deals become even
> more precious," says Walden.
> This all means that the legions of people rushing into the venture
> capital profession -- lawyers, bankers, Hollywood agents and recent
> business-school graduates, among others -- may soon discover that the VC
> business is tougher than they expected.
> "All these law firm associates and bank VPs who went off to become
> venture capitalists may wish they hadn't done it," says Doug Smith, a
> managing director at Chase (CCF) H&Q. "They thought they'd make a
> million bucks a year. And many won't."
> The changing landscape leaves VC firms with bigger challenges. In the
> last year, many have expanded their practices and fattened their funds
> to participate in the increased deal flow. Now that the brakes are
> grinding on the IPO gravy train, you'd think VCs would want to scale
> back. But many say they can't. They need to be bigger to compete with
> the firms that have already bulked up. As a result, venture firms are
> pushing full-speed ahead to build new franchises and differentiate
> Take Rosewood Ventures, a San Francisco-based firm established in 1986,
> best known for the funding of traditional retailers like Jamba Juice,
> Noah's Bagels and Hooked on Phonics. In the last few months, Rosewood
> has retooled itself for some major Net investing, doubling its number of
> partners by hiring Robert Keller, the former head of Internet banking at
> Hambrecht & Quist, and Anne Martin, his counterpart at Deutsche Banc
> Alex. Brown.
> Earlier this month, Rosewood began raising a $400 million fund, more
> than three times the size of its previous venture fund. The firm raised
> half that amount with a few phone calls and expects to have the rest by
> June, says Chip Adams, Rosewood's cofounder. As part of its pitch, the
> firm boasts it will be the first venture firm to have eBay (EBAY) CEO
> Meg Whitman (WH) on its advisory board.
> Rosewood isn't alone in trying to rise above the clutter to avoid
> suffocating beneath it. One of the most respected venture firms,
> Greenwich, Conn.-based General Atlantic Partners, issued a news release
> last week to call attention to its $1 billion commitment from insurer
> American International Group (AIG) .
> "As the world gets more competitive, it's important to distinguish the
> kind of entity we are and our track record," says Steve Denning,
> managing general partner at General Atlantic, which quietly made early
> investments in successes such as Priceline.com and E-Trade.
> And although Denning acknowledges that valuations of online companies
> have dropped, he also says the growing competition and the need to
> compete globally made it necessary to raise the $1 billion. "When trying
> to build a pre-eminent global equity firm, you need this sort of scale,"
> he says.
> The fundraising today won't necessarily lead to a bloodbath tomorrow,
> though it's going to test which venture firms can execute in an
> unforgiving market. Some VCs say no one is forcing them to invest their
> funds quickly. Their investors respect their caution. "I'm taking a
> breather," says Virginia Turezyn, a managing director at Infinity (INF)
> Capital. Turezyn is no longer speculating on young management teams.
> "The limited partners expect me to exercise more judgement in turbulent
> times," she says.
> The last six months were unusual because companies went public at what
> previously would have been considered a premature stage. In coming
> months, venture firms will spend more money on businesses that had been
> poised to go public. Online retailer Furniture.com was recently looking
> for another round of funding even though it has filed to go public,
> according to a source familiar with the company who asked not to be
> Most significantly, though, the role of venture capital in the economy
> has become so important that it's not likely to decline to its earlier
> levels -- either in total dollars or in returns. "There's a big
> difference between now and 20 years ago," says Cliff Higgerson, a
> general partner at ComVentures. "We used to finance niche companies, but
> now we're backing companies that have the potential to become huge."
> The Internet Economy still looks to the venture business for fostering
> technological innovation. Few VCs expect the sweeping changes to come
> from the corporate giants. Yet even Higgerson, who resists overstating
> the potential for a down cycle in venture money, admits it's bound to
> happen. "The euphoric returns can't be sustained," he says.
> Others say the glut of money will lead VCs to fund weak companies even
> if the IPO market stays down. There are only so many people with the
> technical talents to start the next wave of Internet infrastructure
> companies. The firms that can't land these deals will be in trouble. And
> those with huge piles of cash may feel some pressure to use it anyway.
> Sure, VCs are supposed to exercise good judgment, but their limited
> partners aren't paying them a management fee to not invest in new
> companies. They're caught between a rock and a hard place, and some
> won't be able to escape.
> The week after the Nasdaq's brutal tumble, venture funds continued to
> raise billions of dollars.
> VC Firm Capital Raised ($m) Area of Investment
> Aspect Comm $50m Application service providers
> BA Venture $500m Broadband and wireless communications,
> software and b-to-b plays
> Carlyle Internet $685m European Internet and new-media firms
> Gazelle TechVenture $60m Tech companies based in Indiana
> General Atlantic $1000m Internet startups at all stages
> Horizon Ventures $82m Communications, Internet infrastructure
> and software companies
> Labrador Ventures $90m Early stage information technology
> Morgenthaler $570m Early stage Internet and software
> Ridgestone $100m Entertainment, telecom and new-media firms
> Springboard Angels $3m Early stage software, wireless and
> Internet companies
> Woodside Fund $135m Early stage b2b and infrastructure
> Week Total $3,225m
I love the smell of old warehouse in the morning. It smells like... high valuation. -- Yonald Chery
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