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Venture Capital Financing Is Further Sapped by Events | STEVE LISSON

        Wednesday September 26 08:57 AM EDT
        Venture Capital Financing Is Further Sapped by Events
        By MATT RICHTEL The New York Times

        Already suffering from the dot-com bust, venture capital investing is being further challenged in light of the recent terrorist attacks and growing signs of recession.
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                      SAN FRANCISCO, Sept. 25 Venture capital investing, the high-risk financing of early-stage companies that has been markedly curtailed in the last year, is being further challenged in light of the recent terrorist attacks and growing signs of recession, those investors say.

        The venture capitalists assert that the slowing of the economy, coupled with an uncertainty about the public markets, is affecting all facets of their industry, including their ability to raise new funds, their decisions about which and how many companies to invest in, and their expectations about when their existing investments will become profitable.

        Putting a fine point on the concern, the National Venture Capital Association issued a statement today saying the industry "is preparing for an extremely difficult economic environment" in the next 12 to 18 months.

        At the heart of the issue is a question about how venture capitalists can expect to sell the investments they make. Typically they take their companies public, or sell them outright. But those so-called "exit strategies" are sharply limited, said Mark Heesen, president of the National Venture Capital Association, a trade group based in Arlington, Va., with 400 member firms.

        "We were already in tough times," Mr. Heesen said. "What Sept. 11 did was make the likelihood of the I.P.O. market opening in the next four quarters pretty unlikely. A lot of V.C.'s are saying it might not open until 2003," using the abbreviation for venture capitalists.

        The investors say that as a result, they must put more money into companies in which they are already invested, making sure to keep them afloat until an exit strategy emerges. The numbers on investments made in new companies bear that out: this year, venture capitalists will invest about $50 billion in start-up companies, Mr. Heesen said, compared with $105 billion last year.

        Still, venture capitalists point out that this market appears to be so difficult because this year is being compared with the two years previous, which were anomalies, with exorbitant returns being driven by the dot-com boom, and the expansion of the public markets.

        Steve Lisson, editor and publisher of InsiderVC.com, said recent events were reminiscent of the time around the gulf war, when the industry had its last downturn. At that time, the ability to attract capital to invest in start-ups "fell off dramatically," but he said the industry bounced back within several years to have the "best period in its history."

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Venture Capital Financing Is Further Sapped by Events

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    Behind the VC Music
    Wednesday, November 22, 2000
    By Mark Gimein

    Stephen Lisson is not a conventionally likable guy. On more
    than one occasion, he's implied that I'm the single stupidest
    reporter he's ever talked to. He has kept me on the phone for
    hours at a time listening to the most arcane statistics, until I've
    slammed down the phone in frustration. He calls people who
    disagree with him "lickspittles." He dismisses many of the
    visitors to his Website as "parasites."

    And yet over the past few months I have repeatedly gone back to
    Lisson and his new Website, InsiderVC.com, because Lisson has
    the best data out there about venture capital, and often the most
    interesting things to say about it.

    Venture capitalists are the rock stars du jour of the financial
    world, a species of money managers who are believed capable of
    superhuman wisdom. Business magazines tend to assume that
    the richer you are, the smarter you must be, and the Internet
    boom has lavished untold riches on the venture capitalists who
    invested early.

    "Untold" is a key word here, because hardly anyone knows
    exactly how great these riches are. In this way, venture-capital
    funds are very different from, say, mutual funds. Venture
    capitalists talk vaguely about "triple-digit returns," but even
    successful funds tend to keep their returns a closely guarded
    secret. And even when they do reveal numbers, they can be hard
    to understand.

    This is where Austin, Texas, entrepreneur and venture-capital
    gadfly Stephen Lisson comes in. Through years of research and,
    apparently, a lot of cooperation from a network of sources
    willing to send him copies of the reports that venture-capital
    firms send out to their investors, Lisson has gathered an
    immense database of information about venture-capital firms'
    investments and profits.

    Lisson doesn't make all his data public--much of his information

    is limited to subscribers, and he can be picky even about whom
    he allows to subscribe. But what he's already revealed in the
    public sections (for example, see: Database Example) of
    InsiderVC.com is fascinating. Some of his data shows exactly
    what you might expect. Benchmark Capital Partners' 1995 fund-the
    fund that famously invested in eBay--has already returned to
    its investors 38 times the money they put in. Investors who put
    money into the fund that Kleiner Perkins Caufield & Byers,
    Silicon Valley's best-known venture-capital firm, raised in 1996,
    have already made a similarly spectacular return of over 1,000%.

    But you'll also find that the 1997 fund raised by Hummer
    Winblad, another venture-capital firm that has traditionally
    received a lot of attention from the press, has so far returned
    only 42% of its investors' money. That might be a decent
    showing in any other era, but in the middle of the biggest
    technology boom or bubble in history, it's not great, and not
    nearly as good as some of Hummer Winblad's peers. (Typically,
    venture funds distribute cash or stocks as the companies in their
    portfolio are sold or go public. In theory, that means they can
    continue paying out money to investors for a very long time, but
    in practice, almost all of their profits are made in the first six
    years of the fund.)

    Even more interesting are the data that Lisson has gathered on
    how venture capitalists value their investments. Venture
    capitalists measure their own performance by an "internal rate of
    return"--an annualized rate of increase in the value of their
    investments. Often that'll be a number in the high double digits,
    sometimes in the triple digits. Sounds pretty good when you
    compare it with the typical mutual fund. But if you look at the
    InsiderVC.com database, you'll find that funds claiming
    immense annual returns sometimes pay out a lot less money to
    investors than you'd imagine.

    As of March 2000, Benchmark claimed an annualized return of
    an amazing 279% for Benchmark III, the fund that the firm
    raised in 1998. But wait a second! Lisson's data also show that
    Benchmark III hadn't actually distributed any cash or stock to its
    investors. That 279% return was based on a guesstimate of the
    value of the companies Benchmark has invested in--companies
    that, since they hadn't gone public, are notoriously hard to value.
    One of those companies, Living.com, has already gone bankrupt,
    reducing the value of Benchmark's investment from an estimated
    $74 million to zero. And it's hard to believe that, with the Net
    bubble bursting, Benchmark's investment in eBags.com is really
    worth the $20 million-plus that Benchmark valued it at in

    For individual investors who don't have a prayer of putting their

    money into funds that deal only with tech insiders, large
    institutions, and foundations, analyzing exactly how much the
    top funds make can certainly seem like an academic exercise. It
    can all sound arcane, confusing, and dull, and if you are not an
    investor in venture-capital funds, I don't recommend it as a
    hobby or a business. But it's important that somebody do it.
    First, because venture investment is the engine driving much of
    Silicon Valley's technological innovation. And, second, because
    it's important for somebody like Lisson to remind investors and
    the business press that venture capitalists are not the gods of
    finance they are often made out to be, but instead, very well-
    trained money managers. Sometimes very smart money
    managers, sometimes very lucky money managers, but
    nonetheless, financiers who'll often make a lot of money and
    sometimes, like the rest of us, flub it.

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