Steve Quayle News Alerts

June 9, 2002
By Jim Hopkins, USA TODAY

SAN FRANCISCO — U.S. venture capitalists, whose multibillion-dollar investments fueled the 1990s economic boom, are losing money at breakneck speed.

Venture-capital firms lost as much as 32% — and possibly more — on their start-up investments in 2001's fourth quarter, a report out Monday is expected to show. That's a staggering loss considering annual VC profits averaged 54% over the past three years.

The trend is ominous for the U.S. economy, which depends on start-ups for innovation and most new jobs. Equally disturbing, entrepreneurship typically soars in a downturn as laid-off workers start their own firms. Many companies that fed the dot-com boom began during the early-1990s recession.

But now there are few similar hot niches for new enterprises. And fewer entrepreneurs are chasing their dreams. Just 12% of U.S. adults took part in start-ups last year vs. 17% in 2000, a recent study said.

Driving these dramatic changes:

* Venture profits crater. VCs, who invest on behalf of wealthy individuals and institutions, are on a money-losing streak. The fourth-quarter loss would be the fourth in a row, says the National Venture Capital Association.

* Cash is piling up. VCs are sitting on a record $95 billion from their frenetic 1990s fundraising. That's almost twice as much as two years ago, when VCs were pumping money into new ventures, especially in tech industries, almost as fast as it came in the door.

At their current pace, VCs will spend only about $20 billion of the uninvested money by the end of this year, says NVCA research chief John Taylor.

Some of the money is flowing to companies in which VCs already invested — just to keep them alive. That's a big change from the boom years, when VCs were selling their companies more quickly for huge profits through initial public offerings. Since, the IPO market has dried up.

* Fundraising has tanked. VCs got $1.4 billion from investors in the first quarter — the lowest since 1996's third quarter. That's barely 13% of the amount raised a year ago. And it's a speck of the record $30.3 billion raised in spring 2000, when the tech-rich Nasdaq index peaked.

Some sidelined VCs are talking about raising money again. But they're waiting until they report better profits on cash investors already gave them. VCs "don't have a great story to tell right now," says Jana Matthews, a consultant to start-ups.

Some entrepreneurs hunting for VC money say the financing freeze is thawing. FareChase, a developer of travel-related Web-site software, wants $4.5 million. After Sept. 11, says spokesman Jeff Hodes, VCs asked: "Travel? Are you serious?" But the New York company, begun in 2000, has signed major customers — leading VCs to reconsider.

http://www.usatoday.com/money/general/2002/06/10/venture-capital.htm