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Five years after the Dot-Com Bust

Correction update: The statistics on how many bubble-era companies are alive, and how many are out of business, came from VentureOne, and this is now correctly reflected in text below.

Back in 2002, venture capitalist Tom Crotty stopped by our office for an interview and seemed pretty depressed: "1999 funds, they're screwed," he said. He referred, of course, to the hopeless outlook for venture capital funds raised in 1999. They were invested at the top of the market at outrageously high valuations. Many of the companies backed went out of business.

But in our take today on the VC industry, (or here, if you still can't be bothered to register), we noted how Crotty's firm, Battery Ventures, like many other venture firms, has done much better than expected. We noted again the unbelievable fact that there are still as many, if not more, venture firms today than there were at the peak of the Bubble.

The article is part of the Mercury News' series of stories (or here) this week pegged to the anniversary of the Dot-Com Bust.

True, many of the new VC firms started in 1999 and 2000 have slowed their investment pace drastically, and may be singing their swan songs without us really knowing. Indeed, only 786 firms made investments during the 4th quarter of last year, compared to 1,385 firms making investments in the 4th quarter of 2000, according to Venture Economics. Though the latest numbers may also reflect a slower, more sober investing climate -- not necessarily pending death of venture firms.

The VC story is one of the two more upbeat stories in the Mercury News series (see yesterday's on innovation). The first two days (series started Sunday) were more sober. The VC industry collectively saw an Internal Rate of Return of 14 percent for the most recent period in 2004, compared to 232 percent in 2000. But hey, it's saying something that it's still positive. With investors still pouring all this money into the VC sector, you'd think all the competition among firms would drive down returns for everybody.

Another interesting statistic, courtesy of VentureOne: In 1999, there were 2,161 initial VC financings of start-ups, and 40 percent of those are still alive and kicking (private and independent), with only 32 percent out of business. Rounding out the rest, 3 percent are publicly held, and 25 percent acquired or merged. In 2000, there were 2,680 financings, and 47 percent are still alive and kicking, with 34 percent out of business, one percent publicly traded, and 18 percent acquired or merged.

Also, see more analysis of existing VC firms in extended entry, below, which suggests the biggest fallout has been among corporate VCs.

"VC Industry Survives"

Source: VentureOne:

Investors with 2 or more equity investments in US venture backed companies (includes Corps, LPs, I-banks, PE firms that do some VC, etc.)
1995: 406
1999: 1229
2000: 1897
2004: 894

VC (ONLY) investors with 2 or more equity investments in US venture backed companies
1995: 200
1999: 547
2000: 779
2004: 603

US-Based VC (ONLY) investors with 2 or more equity investments in US venture backed companies
1995: 189
1999: 472
2000: 668
2004: 523


Mike- these have been great articles! I left Sun in Oct to venture into technical recruiting as I saw that the job market was/is heating up due to VC funding being up 60% and companies starting to spend money and hire.

Robert Greene on March 9, 2005 6:39 PM
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In response to your front page story on March 9 about the "revival" of VC firms ("investors' cash is flowing again" the headline read on page 12A), I am compelled to say that my impression as a corporate attorney in the Valley, and the virtually unanimous impression of the other corporate attorneys and VC's in the Valley that I deal with, is not quite so rosy. I should qualify this, however, by adding that I generally represent start-up companies (and I mean truly start-up companies, from initial incorporation and funding by founders to their initial VC or outsider financing) and emerging companies, where for the last five years the VC funding has been, and remains, anemic.

Unfortunately, I believe you have been taken in by a number of factors in producing what essentially amounts to a VC propaganda piece. These factors include a fairly simplistic look at the numbers, talking only to VC's and not to start-up entrepreneurs, and the general feeling (which is pervasive in the Valley) that if we say the VC money is flowing again often enough, perhaps we can will it to come true.

The fact is that VC financing for truly start-up companies, the types of companies for which Silicon Valley is famous, is not flowing. VC's are instead insisting that companies have product and, in most cases, healthy revenues before they will invest. Of course, this type of investing does not merit the description "venture" and is, rather, more of a merchant banking type of investing. As an example of this, anecdotally, I just received a letter from the founder of a company I work with that is looking for financing in which he stated, "[e]ven with a substantial product in hand, VC's demand numbers like $250K per month revenue to consider investing. When we reach that level we'll never look back, much less seek VC financing." Needless to say, they are exploring other avenues of financing.

This view may only be the opinion of one entrepreneur, but I hear it all over the Valley even in this new environment where the investor cash is supposedly flowing. The true test is how many new companies are VC's backing, and the numbers there do not support your storyline. I think there has been a fundamental change in the approach of VC's and that they have become a very risk averse group. That is bad news for Silicon Valley.


Corey Levens
Levens Law Firm
(650) 387-9859

Corey Levens on March 11, 2005 10:21 AM
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