From: Rohit Khare (Rohit@KnowNow.com)
Date: Fri Dec 29 2000 - 03:50:55 PST
>As of mid-December, only 180 companies received early-stage venture
>funding in the fourth quarter for a total of $2 billion. That's a
>sharp drop from the fourth quarter of 1999, when 604 startups
>received a total of $6.1 billion. It's also down substantially from
>the third quarter of this year, when 632 young companies took in
>$5.4 billion, according to Venture Economics.
>Two weeks ago, venture capitalist Jon Staenberg ordered breakfast at
>the Town's End restaurant in San Francisco from a woman who was laid
>off from Food.com. Turns out the waitress had been a director-level
>employee -- until the online take-out service cut its staff in half.
>Venture firms as a whole have $30 billion to invest in the first
>half of next year, but just 10 percent of that will go toward
>early-stage companies, predicts Jesse Reyes, a vice president at the
>industry research firm Venture Economics. Early-stage funding hasn't
>been that low since the early 1990s, he adds.
Seed-stage VCs arm for 2001 odyssey
By Matthew A. DeBellis
Redherring.com, December 29, 2000
Two weeks ago, venture capitalist Jon Staenberg ordered breakfast at
the Town's End restaurant in San Francisco from a woman who was laid
off from Food.com. Turns out the waitress had been a director-level
employee -- until the online take-out service cut its staff in half.
Seed-stage venture capitalists are finishing the year in the same
unsettling fashion as that waitress. With the IPO window virtually
shut, they're trying to steer unprofitable startups toward business
models that hold promise for profits sooner than originally expected,
or they're shutting the companies down altogether. It's the same
position most VCs are in today, but what makes it especially
difficult for seed-stage firms is that they don't have the luxury to
shift their investment strategy, by, say, making large investments in
On the bright side, seed-stage firms don't have the same pressure to
keep making investments as do VCs with billion-dollar funds. Seed
firms don't have major limited partners (such as state pension funds)
breathing down their necks to produce superior returns. Their initial
investments are often in the hundreds of thousands, so they can take
more time to put their money to work. And once they make an
investment, they can spend more time and energy helping a startup
succeed. The goal is to build the startup to a point where it's
attractive enough for a larger VC to fund it and eventually take it
public or sell it.
Traditionally, seed firms make very few investments, but in 2001
they'll make even fewer. There are two reasons. One, the naturally
skeptical firms will be even more conservative because they'll spend
lots of time with current portfolio companies. Two, the larger VCs
that seed-stage firms feed with deals aren't looking for many new
ones because they're having portfolio problems of their own and can't
get their companies public. For those reasons, startups that catch
the attention of seed investors in the new year will have to have
undeniably sharp ideas and technologies.
Venture firms as a whole have $30 billion to invest in the first half
of next year, but just 10 percent of that will go toward early-stage
companies, predicts Jesse Reyes, a vice president at the industry
research firm Venture Economics. Early-stage funding hasn't been that
low since the early 1990s, he adds.
By all indications, seed-stage venture capital firms will invest in
startups in 2001 at a slower pace than they have for the past several
years. Angel investors also aren't expected to show up in as many
deals next year, because the downturn in the stock market has hurt
their net worth.
"Startups are going to be tough to do next year," Mr. Reyes says.
It's not difficult to understand why. Mr. Staenberg, the sole partner
at Staenberg Venture Partners in Seattle, made six early-stage deals
in 2000, but he plans to make half as many next year. He says he
needs to spend more time working with portfolio companies, not
investing in new startups. "There's a pretty strong incentive to hang
tight," he says. "There's lots to do with the existing portfolio."
Some say there are too many seed-stage venture capital firms and that
the field will thin out next year. In 1998, there were 185 such firms
that managed funds under $200 million, but that number has exploded
to 368, Mr. Reyes says.
SEEDS SPROUTED LIKE WEEDS
A number of veteran VCs and entrepreneurs started seed-stage firms
this year, yearning to spend more time with fewer startups. Serial
entrepreneur Dado Banatao left the Mayfield Fund in June to start
self-funded Tallwood Venture Capital. Ruthann Quindlen and Derek
Proudian left Institutional Venture Partners and Mohr, Davidow
Ventures, respectively, to start Ironweed Capital. And venture
capitalist Bart Schachter convinced Chris Kersey to leave Menlo
Ventures to help him run a new boutique, Blueprint Ventures.
These small firms didn't waste any time doing deals. Tallwood, for
example, has made a dozen investments. Its portfolio includes Cielo
Communications, which makes optical components; Sandcraft, a maker of
microprocessors; and Sentica, which builds wireless Internet
Among the new VCs are the so-called boutique firms that focus on
specific industries, such as telecommunications or networking
technologies. Blueprint, for example, targets "next-generation
communications companies." Those sharply focused firms could suffer
if caught in a market downturn, but for now their chosen sectors are
Seed-stage VCs say the flow of high-quality new business ideas is
steady, but they're being picky and are funding fewer companies. As
of mid-December, only 180 companies received early-stage venture
funding in the fourth quarter for a total of $2 billion. That's a
sharp drop from the fourth quarter of 1999, when 604 startups
received a total of $6.1 billion. It's also down substantially from
the third quarter of this year, when 632 young companies took in $5.4
billion, according to Venture Economics.
While VCs as a whole invested a record $79.9 billion in the first
three quarters this year (up 137 percent from the same period in
1999), the portion of VC invested in early-stage companies fell in
the third quarter, Mr. Reyes notes. The early-stage portion of the
total fell to 19.1 percent in the third quarter from 25.7 percent in
the prior quarter, he says.
There are two market segments where seed-stage investors continue to
be active: telecommunications and biotechnology. "We're seeing
outstanding opportunities [in those sectors] right now," says Jim
Tullis, a managing partner and cofounder of Tullis-Dickerson &
Company, a health care-focused VC firm in Greenwich, Connecticut.
"This is not a time to be standing on the sidelines."
Telecommunications and biotech are ending the year on a high note,
but investors still have concerns. For instance, some telecom VCs
believe there are too many optical networking startups. And
biotechnology always will be one of the riskiest areas because such
companies usually require several money-losing years of development
and government approval before reaching success.
Seed-stage firms may have a tougher time in 2001, but don't feel too
sorry for them. Historically, they've outpaced their larger brethren,
Venture Economics says. Over the past 20 years, early-stage investors
enjoyed an average investment return of 24.2 percent, compared to the
industry average of 19.9 percent.
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