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Trends: August 2001

Israeli venture capital drops, US exits rise but early stage investments slump, annex funds on the up, VCs get the Hollywood treatment …

Israeli private equity investments slump
Investment in privately held start-up companies fell by 30 per cent in Q2, according to a report by IVC Research Centre in Tel Aviv. $513m was invested in 137 Israeli start-ups during Q2, compared to $641m in 155 companies in Q1 this year. Industry executives have accredited this fall in investment to both the downturn in the technology markets and the Nasdaq crisis. Despite this crisis, leading US venture capital firms such as Benchmark Capital and Sequoia Capital, who raised $220m and $150m respectively for Israeli investments this year, have launched operations in Israel.
AltAssets 6.8.01

Sudden rush for private equity exits
Cinven's recent sale of IPC to AOL Time Warner and the sale of Kymata by a consortium of venture capitalists are indicative of a kind of desperation among private equity houses, according to The Wall Street Journal (3.8.01). It reported a sudden rush of exit activity after ‘an exceptionally slow start' to the year. Why? Because firms are under pressure to start returning capital to investors - albeit at a much lower rate than anticipated last year - as they have their eye on their round of fund raising. Institutional investors are apparently supportive of the recent flood of exits: ‘The best funds have a greater focus on exits than before,' said David Currie of Standard Life Investments Private Equity.

Dot.com death rate drops to slowest for months
The remorseless obliteration of dot.com companies slowed significantly in July to suggest that the worst may now be over for the shattered sector, according to Webmergers. There were 32 global dot.com shutdowns in July, down from 58 in June and the lowest number since September last year. Webmergers now estimates that about eight per cent of all the internet companies that have ever had funding from VCs or angels have died. Its figures show the bloodiest months to have been the first half of the year but the situation may now be improving. At least 592 internet companies have now folded since January 2000, of which 367 have been this year. The biggest share has been claimed by b-to-c firms, which made up 78 per cent of the total, but their share has been falling in recent months.
AltAssets 2.8.01

US seed deals creep up…
US venture capitalists are drifting back to seed deals despite a difficult investment climate, according to figures recorded by VentureWire (17.8.01). The numbers remain small, but there is evidence of a small increase in seed capital interest: while May 2000 saw 60 deals, May 2001 saw just four deals. Yet July's total reached 12 and even August, traditionally a quiet month, has witnessed eight seed deals. The interest appears to be concentrated among the bigger US names, such as Polaris Venture Partners, ARCH Venture Partners and Venrock Associates.

…but overall investment plunges
Venture capital investment in the US dropped by a staggering 66 per cent in the second quarter of this year to $8bn, down from $24bn at the same time last year. New figures by PriceWaterhouseCoopers and VentureOne showed that the amount invested in US companies fell 21 per cent from the previous quarter. The figures are likely to cause concern that the technological innovation that has fuelled the success of the US economy over recent years will be stopped in its tracks because of a lack of funding.
Financial Times 14.8.01

VCs go cap in hand to investors
The US has seen a swathe of annex fund-raising attempts by venture capitalists needing extra cash to keep their portfolio companies afloat. New Enterprise, Accel Partners and Enterprise Partners are just some of the firms that have had to go back to their limited partners to ask for more money. The reason? As the opportunity to float investee companies has dried up with the recent stock market crash and as M&A buyers will now only pay rock-bottom prices for these companies, VCs are finding that they are unable to exit their investments. The portfolio companies can therefore turn only to their VCs for more cash to survive. And most agreements prevent firms from taking money from other funds that they have raised to finance those companies. Limited partners aren't particularly pleased with this latest turn of events, but say that they have little choice - if they don't pay up, they'll lose their initial cash as well as seeing their share diluted.
Venture Capital Journal August 2001

Internet economy hits new low with closure of The Industry Standard
The Industry Standard, one of most striking media successes of the internet economy, has suspended production, laid off most of its staff and put itself up for sale, signalling the end of one of the more remarkable episodes of the boom times of the late 1990s. The magazine set an all-time publishing industry record in 2000 for the number of pages of advertising, reflecting the insatiable demand of fledgling dotcom and tech companies for media exposure. It was a must-read for venture capitalists, entrepreneurs, and anyone with even the faintest interest in the internet economy.
AltAssets 17.8.01

VCs get their 15 minutes
Remember the swathe of films around ten years ago that portrayed the people behind the takeover boom of the late eighties as greedy, grasping and downright evil? There was Wall Street, there was Pretty Woman and there was Other People's Money, to name just a few. Now the film-maker's attention has apparently switched to a new type of villain - the venture capitalist. Startup.com was a documentary about the founders of a ticket-paying web site who had their dreams dashed by Kleiner, Perkins, Caufield & Byers and Highland Capital Partners. Watch out now for a new Coen brothers movie, The Man Who Wasn't There, which features a ‘shifty venture capitalist', according to Entertainment Weekly. Look out, too, for a made-for-TV film from Fox that casts a VC as the main villain. Its scriptwriter Seamus Ruane says that the appeal of the film lies in the fact that it portrays the late-1990s mayhem when money seemed to be sloshing around like water.
PrivateEquityCentral 26.8.01