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Viewpoint: Cautious Optimism Common Among VCs
December 28, 2001
By Steve Tanner

Venture capitalists are no longer the cult figures they were in the mid- to late-1990s, when Kleiner Perkins VC John Doerr made his famous remarks about the Internet bubble being "the greatest legal creation of wealth in history."

Doerr has since apologized for his overexuberance, but the hangover remains. Now, VCs are chowing down on humble pie, rolling up their sleeves and getting back to business.

As we all know, the economy has been in a tailspin in 2001. So it's no surprise that the private equity market, which closely follows the trajectory of the public markets, has been licking its wounds from a less-than-stellar year.

Looking ahead, many VCs and industry insiders remain pessimistic about 2002 -- but just as many imagine the glass as being half full, realizing the importance of confidence as a catalyst for future growth and prosperity.

But the bullish perspective has picked up momentum only recently.

The National Venture Capital Association, in a report published on www.nvca.org on Sept. 25, had this to say about near-term projections: "The venture capital industry is preparing itself for an extremely difficult economic environment over the next 12-18 months."

The report also expressed concern about the dearth of exit options for later-stage portfolio companies, as the IPO and merger and acquisition markets remain tight.

On the bright side, it's important to remember that the NVCA report came out just two weeks after the Sept. 11 terrorist attacks, which would have tainted any sense of optimism for a recovery.

Greater respect on Wall Street for newly public companies toward the end of 2001 has proven that things are indeed looking brighter. Also, Silicon Valley startups PayPal Inc. and NetScreen Technologies Inc. are expected to go public this month.

Today, a little more than three months after 9/11, venture capitalists have expressed more hope, however restrained, that the coming year will usher in a modest recovery for the VC market.

Since the money is waiting to be invested, says Raman Khanna, general partner and managing director of Diamondhead Venture Management, the key resource is time, not funds.

"As a lot of the weaker companies get shut down, there will be more time to invest in the winners," says Khanna, who remains optimistic. "I feel [the VC market] should start picking up next year, because a lot of the existing funds are being put into the strongest portfolio companies."

Will Stewart, a general partner with APV Technology Partners, agrees. He believes that the VC market began its recovery toward the end of 2001, but expects the washout of failed investments to last an additional six to nine months.

Matt Bolton, an analyst for Woodside Fund, is cautiously optimistic. He believes that 2002 will bring a small amount of growth in IT spending, about 2 percent, which can only help venture-backed technology startups sell their goods.

Dan Ahn, managing director for Woodside Fund, says that software and semiconductor components will get additional sales traction in the coming year. That said, he underscores the familiar mantra that a proven high return on investment is the ticket for moving inventory.

While Khanna and Stewart both feel better about the coming VC investment climate, both are anxiously anticipating the Next New Thing.

"What is the key technological trend for the future?" asks Stewart, repeating my question. "I don't see that yet."

But he assured me that once he finds out, he definitely won't share his revelations.

Whatever the next wave of technology is, hopefully the investors have learned their lessons. As recent economic history has shown us, the faster you rise, the harder you fall.

But history has also shown us that the harder you fall, the smarter you rise next time.

Steve Tanner is a Biz Ink reporter. You can reach him at stanner@svbizink.com.
To send a letter to the editor, e-mail vbowesmok@svbizink.com.




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