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 firstname.lastname@example.org.