From: Dan Kohn (firstname.lastname@example.org)
Date: Fri Dec 29 2000 - 07:26:38 PST
Xander and I have had a theory for a while that service in almost all
restaurants is so bad today, because the people who were talented,
intuitive waiters 10 years ago are now junior marketing people in the
booming economy. The folks who took their place are far less qualified,
showing in a microcosm why there are natural limits on economic growth.
This article, in the converse, seems to prove the assertion and also to
give hope for better service in the near future.
-- Dan Kohn <mailto:email@example.com> <http://www.dankohn.com> <tel:+1-650-327-2600>
-----Original Message----- From: Rohit Khare [mailto:Rohit@KnowNow.com] Sent: Friday, 2000-12-29 03:51 To: FoRK@xent.com Subject: Do Not Pass Go: Seed funding dries up almost completely
>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 late-stage companies.
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.
THE LOWDOWN 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 infrastructure.
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 favorable.
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.
WARNING SIGNS 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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