Investment Insight
January 2002
By Becky Bergman

What will venture capitalists look for in the coming year? How about companies with real products and rock-solid management.

To read the headlines depicting the economy’s sluggish hangover the past 12 months, one might wonder who would consider 2002 a good time to invest in new companies.

Well, Vince Occhipinti does. Occhipinti is the founder and managing partner of the Woodside Fund, a Redwood Shores-based venture firm, and he says the current environment is ideal for channeling money into early stage companies this year.

After all, the worst is over, he says.

Ho Nam, a general partner with Altos Ventures in Menlo Park, agrees.

Many venture capitalists were so stunned early last year after the bubble burst that they participated in very few deals. Now, say Occhipinti and Nam, many are ready to re-enter the market.

Both Occhipinti and Nam say entrepreneurs had a variety of investors to choose from two years ago. That prompted many venture capitalists to make shortcuts in the due diligence process for fear of missing the chance to invest in the next Netscape or Yahoo.

From the third quarter in 1999 to the end of 2000, 771 venture funds nationwide raised an estimated $130 billion and invested in roughly 8,500 companies, making disbursements in 2000 greater than all disbursements from 1980 to 1998 combined.

Today, the tables have turned and VCs like Occhipinti and Nam can be - and are - choosey about where to invest their money. This allows them to pick quality companies that are likely to survive the long-term rather than to payoff big in the short-term, says Nam.

Matt Bolton, a venture capitalist with Woodside Fund, says a shift has taken place among the industry. Before the Internet boom, most venture capitalists typically made a handful of deals each year and personally sat on the boards and were heavily involved in a half-dozen companies.

Thanks to the Internet boom and the many companies it spawned, many VCs found themselves busy sitting on as many as 15 boards, sapping up any free time that may have gone to seeking out new companies.

Nam says the recent downturn in technology has forced many entrepreneurs to get realistic about their ideas.

"Entrepreneurs have to be able to show a product to an investor if they have any hope of securing capital," Nam says. "They also need to be able to show some revenue. Venture capitalists don’t want to spend $50 or $100 million and not know if the idea will work."

And there are plenty of examples for entrepreneurs to examine. Take Webvan.com and Pets.com, for starters, both web-based businesses in the Bay Area that crashed hard last year.

Nam, who was familiar with the Pets.com idea - his firm once looked at the business model before turning it down - says the idea was set to fail from the get-go.

"We didn’t think the business economics made sense. Pet food is heavy and the cost to ship it is expensive," says Nam.

Venture outlook

While third quarter 2001 took a beating, venture capitalists like Occhipinti and Nam remain optimistic despite a drop in investment activity in 2001.

Statistics provided by VentureOne state that venture capital firms invested about $6.49 billion in the third quarter of 2001, a 22% drop from the $8.37 billion invested in the second quarter.

Occhipinti points out, though, that 2001 will still be in the top three years for disbursements, regardless of what happened in the fourth quarter of 2001.

That’s because the year 2000 saw the greatest amount of money in history committed to venture capital, according to VentureOne, a San Francisco-based provider of venture capital information.

"In your wildest dreams, you could never have imagined what happen two years ago," Occhipinti says.

And, in looking ahead to 2002, there certainly is not a lack of funds to be disbursed. In fact, according to the National Venture Capital Association, roughly $30 billion to $40 billion worth of uncommitted capital in business - money that has been raised but not yet invested - remains untouched.

"While venture investment overall is on a trend of gradual decline, venture-backed companies continue to complete financing rounds that lay the groundwork for future economic development," says Dave Witherow, president of VentureOne.

While venture capitalists are weary about anything that ends with a dot-com, startups that specialize in creating technologies that help other companies do business more efficiently, are a sure bet in 2002, says Nam.

Occhipinti adds that venture capitalists will be looking for companies that provide necessary products, a stellar management team and the ability to exit through mergers, acquisitions or IPOs.

Although it’s too soon to see any clear-cut winners stand out now, industry leaders say great companies are often created during difficult economic times. Take Intuit and McAfee, for instance. The two companies, still in existence today, received first round funding in the early 1990s, as a recession crippled the economy.

Becky Bergman is an East Bay-based writer, who has written for the Sacramento Business Journal and the East Bay Business Times.

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