"Venture capital blues hit low note" July 19, 2001
By George Avalos

Returns for venture capital funds fall 6.7 percent, the worst 12-month period ever, according to a report

Venture capital funds struggled through their worst 12-month period, according to a report released Wednesday that suggests the blues continue for emerging technology companies.

For the first time, returns for venture funds that provide initial financing for private companies turned negative over a one-year stretch that ended March 31. During the grim 12 months, U.S. venture capitalists suffered a decline of 6.7 percent in the returns generated by their portfolios. The bleak results were detailed in a report by Venture Economics and the National Venture Capital Association. The trade group examined 1,400 U.S. funds.

The average venture fund recorded a 24.2 percent gain in the comparable year-ago period, which occurred during the height of the Internet investment boom that delivered huge profits to venture capitalists and their limited partners.

"The venture capitalists are having a tough time," said Frank Catalano, a registered principal with American Investors Co. in Walnut Creek. "They are not used to having their investments go negative before they can even go out and get financing in the public stock markets."

Things have been even worse in the most recent six months. For the period from October 2000 through March 2001, venture capital funds suffered a 21.1 percent loss. Returns for venture capital investments have declined for five straight quarters.

To be sure, the great majority of private investors are large institutions or corporations, rather than individuals and consumers. But the fortunes of private investors can reflect how well the public stock markets will fare, especially for technology and biotech companies. And that can affect plenty of individual investors.

There were some bright spots in the new report. Despite these short-term declines, the investors in venture capital funds typically stash their cash in companies over much longer periods. That means they still have a number of years to harvest profits from their seed capital before the private company is sold or taken public through an initial public stock offering.

"Over the long term, the industry is doing very well," said John Taylor, vice president of research with Arlington, Va.-based National Venture Capital Association. "There is no reason to believe those returns won't resume."

The average annual gains for a venture fund are typically in the 20 percent to 25 percent range.

The early-stage investors produced the smallest losses, according to the survey. Early-stage private financing resulted in an average loss of 2.6 percent for the 12-month period ended March 31. Intermediate-stage investors had a loss of 11.7 percent. Later-stage venture funds had a loss of 7 percent.

More recently, some signs of life have begun to emerge in the private financing market, said Matthew Bolton, an analyst with Woodside Fund, a Redwood Shores venture capital firm.

"We have just had the biggest six-month period in our history in terms of placing money," Bolton said.

That doesn't mean venture funds have unleashed a torrent of private financing. Even if some deals are being made, the financiers are keeping a tight grip on the spigot, Bolton said.

"The terms for an investment are more investor-friendly than entrepreneur-friendly," Bolton said. "The investors will commit to a certain amount of funding. But that funding is staged and is tied to performance benchmarks. The company has to meet certain milestones by a certain time."

Associated Press contributed to this report. George Avalos covers the economy. Reach him at 925-977-8477 or gavalos@cctimes.com.

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