[BusinessTeam] a bit of good cheer in these dark .com days...

Message-ID: <6B75EF096AE0BE428B8CEDEA89C5F6327822D2@exchange01.lab49.com> · Fri Nov 03 16:37:03 2000 UTC

VCs Haven't Lost Their Sense of Adventure

Venture capital spending may be slowing, but there's still a lot of money
out there. Some of it will create new dot-coms.

 <mailto:jime@thestandard.com> By Jim Evans

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Jim  <http://www.thestandard.com/people/display/0,1157,1252,00.html>
Breyer

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ONI  <http://www.thestandard.com/companies/display/0,2063,99805,00.html>
Systems Corp. (ONIS
<http://www.thestandard.com/article/stock/1,2107,,FF.html?sym1=ONIS> )
PricewaterhouseCoopers
<http://www.thestandard.com/companies/display/0,2063,57443,00.html>

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IS&column=istandard_columns&width=150&rowheight=15&ahr=2&cup=009933&Ignore
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Reports  <http://www.thestandard.com/article/display/0,1151,19675,00.html>
of the Death of the Dot-Com Have Been Greatly Exaggerated

What's  <http://www.thestandard.com/article/display/0,1151,19677,00.html>
So New About the New Economy?

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Email to a Friend
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Print Article
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 <mailto:tips@thestandard.com> Got a Scoop? Tip us off

It's official. The venture capitalist has become the scapegoat of the
Internet Economy. Much like the blame placed on investment bankers in the
1980s, when junk-bond scandals and unfriendly takeover bids seemed to
capture all that was wrong with the times, venture capitalists are now
getting the rap for the excesses of the Internet era and the subsequent
market correction.

"I was talking with an entrepreneur just the other day who said to me,
'Accel, Kleiner, Benchmark and Sequoia are responsible for this downturn
because you all overfunded the Internet,'" says Accel managing partner Jim
<http://www.thestandard.com/people/display/0,1157,1252,00.html> Breyer,
who just a few weeks earlier was ranked among the 40 wealthiest
businessmen under 40. "This is wildly overstated."

There is, of course, some truth to the charge. Venture capitalists have
overfunded the market to a point where there are too many companies with
little prospect for the long run. But lost in the finger-pointing are the
lasting changes brought about by VCs over the last few years. They have
led the creation of a host of huge Net companies that have changed the
corporate landscape. And though there will be a thinning of the ranks over
the next few years, venture capitalism has evolved from a cottage industry
to an established financial sector that has institutionalized risk-taking
and entrepreneurship.

Now that the boom times are over, VCs have become more cautious about
where they place their bets. Yet even in this horrible IPO market, firms
are still raising billion-dollar funds  with very little effort  on the
appeal of investing in startups. Last month, for instance, a little-known
Minnesota firm, St. Paul Venture Capital, raised a fund of $1.3 billion,
an amount that would have been almost inconceivable two years ago but is
now barely news. A few days later another second-tier firm, VantagePoint
Venture Partners of San Bruno, Calif., closed a $1.6 billion fund.

What's striking is that investors are ponying up money now amid widespread
reports that returns are dropping. The second-quarter returns to venture
funds were 3.9 percent, a plummet from the 59.4 percent in 1999's fourth
quarter, according to recent figures from Venture Economics, a research
unit of Thomson Financial Securities Data. Investors apparently don't
believe the hot dot-com days are completely over.

Indeed, Venture Economics projects VC spending to be at least $20 billion
in the third quarter, up from $14 billion in the same quarter a year ago,
but down from $25 billion in the second quarter of this year. Kirk Walden,
who runs PricewaterhouseCoopers
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quarterly survey of venture capital, estimates that 1,200 companies
received venture money in the third quarter.

For many VCs, competition to finance new dot-coms remains intense. Michael
Rolnick, a partner at ComVentures in Palo Alto, Calif., says he recently
finished working for eight weeks at securing a deal with a startup. He
gathered what he describes as an "all-star syndicate of investors" and
shook the CEO's hand to seal the deal. "They called back over one weekend
and told me they got another investor at twice the valuation," he says.

The herd mentality of the business fuels part of the competition. First
came the boom in business-to-consumer e-commerce dot-coms. Then
business-to-business dot-coms were the rage. Now it's optical networking.

Talking about his firm's investment in ONI
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Systems (ONIS
<http://www.thestandard.com/article/stock/1,2107,,FF.html?sym1=ONIS> ) ,
an optical networking equipment maker that had a hugely successful IPO in
June, George Zachary, a partner at Mohr, Davidow Ventures in Menlo Park,
Calif., explains: "When we invested in ONI Systems, people asked us, 'Why
are you funding technologists? You should be doing b-to-c.' But when ONI
went public, everyone all of the sudden everyone said optical is going to
be huge. Now optical is being overfunded."

Some VCs like Andy Rappaport, a partner at August Capital in Menlo Park,
still dabble in even riskier areas like music. While many analysts were
declaring the consumer Internet sector dead, Rappaport invested $6 million
in March and took a seat on the board of Uplister, a music playlist
sharing company that launched at the end of September.

Music is not a hot investment area: A lot of venture capital firms are
steering clear of music for fear of stepping into a potential legal
quagmire, and there's little sign of success in the public markets. But
Rappaport was attracted to the music company because it's in an industry
in the midst of change. The pet-supply market isn't going to change
radically by 2010. The music business most definitely will.

"We're investing in nothing that is about the Internet, but we're
investing in industries that will be changed because of the Internet,"
says Rappaport, taking the long view.

Luke Flemmer
VP Strategic Ventures
nano
phone: (212) 402-7870
fax:      (212) 430-6374
www.nano.com <http://www.nano.com/>