VCs Clam Up

Venture capital funding soared to record heights in the first quarter, but don't expect the funds to flow as freely for the next two. A bear market, a weak initial public offering outlook and carnage in the tech sector have changed the VC scene.

Venture capital funding soared to record heights in the first quarter, but don't expect the funds to flow as freely for the next two. A bear market, a weak initial public offering outlook and carnage in the tech sector have changed the VC scene. - By Larry Dignan

30 May 2000 - You'd never know anything was wrong by looking at the latest VC snapshot. According to PricewaterhouseCoopers' MoneyTree Survey, released May 15, VC funding soared to $17.22 billion, well above fourth-quarter 1999 levels and quadrupling year-ago totals.

But private equity valuations are dropping along with the public markets, and VCs are being more discerning. They expect both the private and public equity markets to take a summer hiatus as interest rate concerns are sorted out.

The weak initial public offering (IPO) climate compounds the problem. Bill Sprague, managing director at New York-based Crest Communications, says four portfolio companies were recently registered for IPOs; two withdrew their plans and one was postponed. The strongest of the bunch, Web hosting firm Interland (proposed ticker: ILND), plans a road show sometime after Memorial Day.

Although Interland is losing money, revenue is ramping up quickly. Companies comparable to Interland have held their value in the market downturn.

The volatility in IPOs has forced Sprague and other VCs to re-evaluate their portfolios. Handing out a lot of funding to concepts is out of style and a path to profits is in.

Brad Garlinghouse, general partner at CMGI's (Nasdaq: CMGI) @Ventures unit, says the great "public venture capital" experiment of 1999 and early 2000 is over. "Companies that weren't ready to go public were going public," he says. "The public market wasn't ready."

It shows in @Ventures' own portfolio. MotherNature.com (Nasdaq: MTHR), a health and wellness e-tailer, has been hammered in the business-to-consumer shakeout since going public in December 1999. Chemdex (Nasdaq: CMDX) has fared better, but has been walloped as business-to-business stocks lost their punch.

Garlinghouse says VCs are shuffling their portfolios and combining properties to create sustainable businesses.

Despite the stock market woes, no one is panicking. VCs know the days of making $12 on every $1 invested are gone, but the historical $5 on every $1 still isn't bad. Garlinghouse says @Ventures isn't changing its philosophy. "We believe in the balanced approach," he adds. "We don't want to get caught in the whims of the market."

www.zdnetasia.com
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