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Forbes
Venture Capital
Venture Capitalists
Slowing Down
NEW YORK - Crosspoint Venture Partners
took an unprecedented step while raising capital for its latest VC fund
late last year. It told investors it changed its mind and didn't need
their money after all.
The Woodside, Calif.-based venture firm, which
backs technology startups, already had $1 billion in commitments for the
Crosspoint 2001 Fund, but its partners wanted to spend more time on existing
investments rather than seek out new companies to back.
Indeed, after getting burned by dot-coms, Crosspoint
and other VC firms are slowing the pace of their first-round investments
in companies, opting instead to spend more time and capital on existing
companies that show potential to generate revenue and profits.
"These guys [VCs] had a big breakfast and a phenomenally
big dinner," says Jesse Reyes, a vice president at data firm Venture Economics,
a division of Thomson Financial. "And now they're pushing back from the
table to digest what the heck they've eaten and figuring out whether it's
going to give them indigestion or not."
Only 501 companies received a total of $5.1 billion
in first-round funding during the last quarter of 2000, compared with
758 companies that got $8.5 billion during the same period in 1999, according
to the National Venture Capital Association and Venture Economics (NVCA
and VE). In contrast, VCs allocated a bigger share of their capital to
follow-on investments. A total of 899 companies collected $14.7 billion
in the last quarter of 2000, compared with 865 companies that obtained
$16.9 billion during the same period the year before.
Enterprise Partners, an early-stage investor,
is another one of many venture firms turning its attention to existing
portfolio companies. The La Jolla, Calif.-based firm, which backs technology,
telecom and biotech companies, used to carve out 30% of its venture funds
for follow-on investments, but it has increased that amount to 45% to
50%, says Drew Senyei, a managing general partner. The reason?
Its companies need more capital to survive, as the time it takes to prove
their business models and reach an IPO has increased significantly since
the market downturn in April 2000.
As expected, the tumultuous public markets, high
valuations and a cooling in IPOs has led to an overall slowdown in venture
investments in the fourth quarter of 2000. VCs spent $19.6 billion that
quarter, compared with $28.3 billion the previous quarter, according to
numbers released by NVCA and VE.
The industry raised about $100 billion last year,
compared to about $60 billion in 1999. VCs still have about $35 billion,
committed by investors, in reserve.
Overall, northern California attracted the most
capital, getting 32.5% of all VC dollars in 2000. The greater New York
area came in second, followed by New England. Surprisingly, however, only
80 new companies were funded in Silicon Valley in the fourth quarter of
last year, compared with about twice that number the previous quarter,
says Reyes. Average first-time rounds have also declined to about $11
million from $15 million a few months ago.
"The amount of new financings is putting a bit
of a chill in the air for entrepreneurs," says Reyes.
But even those companies with a round or two
of financing under their belts shouldn't assume follow-ons are so freely
available. Bob Hoff, a general partner at Crosspoint, met with
40 of his 66 portfolio companies to explain that the investing climate
had become more competitive. During that process, the firm decided against
giving more capital to five of its portfolio companies, freeing up $170
million to spend from its Crosspoint 2000 Fund. The spurned companies
did not convince the firm that they could generate revenue or turn a profit
in the near future, Hoff says.
Crosspoint, an early backer of Foundry Networks
(nasdaq: FDRY
- news - people),
Ariba (nasdaq: ARBA
- news - people),
Juniper Networks (nasdaq: JNPR
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and Brocade Communications (Nasdaq: BRCD
- news - people),
made only two new investments in technology startups in the last few months,
compared with twice that number in the third quarter of last year. The
firm had about 15 IPOs in 1999 and was expecting 20 IPOs last year, but
only had two.
"I don't think they've totally turned off the
spigot [for first-time investments]," says Venture Economics' Reyes. "But
they're being cautious, so most likely there'll probably be some good
companies that don't get funded."