Venture Uptick Coming?

The economy is still drab, and the job market is as unpredictable as ever. But venture capitalists might be starting to show signs of life.

It hasn't shown up in the data, yet, but there could be a lag effect. The first quarter of 2003 represented one of the worst three-month periods on record for communications and networking companies. VCs put about $485 million to work in telecommunications startups during the quarter, an 11 percent drop from the memorably dismal fourth quarter of 2002 (see VC Funding Dips Again), according to the PricewaterhouseCoopers MoneyTree survey.

Data for the second quarter of this year will be available in a few weeks, and some say it will likely show a marked improvement after the doom and gloom of winter.

Indeed, in the past 30 days, there has been a marked increase of deals in the telecom equipment sector, including this string of funding announcements: So what's going on?

The pace of startup investments seems to be picking up, but the time taken to get from first meetings to check writing is remaining constant, venture capitalists say. "Getting deals done these days still seems to take between four to six months," says John Adler, a partner at InterWest Partners.

One theory on the anecdotal increase in deals is that the venture funds raised during the height of the Internet bubble are reaching the point where money either has to be put to work or handed back to the limited partners (LPs), the funds' investors.

Most venture funds are 10-year funds, explains Amity Wall, manager of research operations at VentureOne. The first five years are spent making new investments and the latter five supporting companies with follow-on rounds, explains Wall: "Of course, funds that have a good relationship with their limited partners can get those investment times extended."

Table 1: Top VC Funds Raised in 1999
Investing Firm Name Fund Name Closed AmountUSD ($M)
Softbank Inc. Softbank Capital Partners 01/01/99 $1,500.00
Meritech Capital Partners Meritech Capital I 11/03/99 $1,100.00
Benchmark Capital Benchmark Capital IV 09/30/99 $1,060.00
JPMorgan Partners Octagon Investment Partners II 06/15/99 $1,000.00
Oak Investment Partners Oak Investment Partners IX 09/15/99 $1,000.00
New Enterprise Associates NEA 9 10/22/99 $880.00
Crosspoint Venture Partners Crosspoint Ventures 2000 12/15/99 $850.00
Austin Ventures Austin Ventures VII 11/22/99 $825.00
Mobius Venture Capital Softbank Technology Ventures V 07/22/99 $633.00
U.S. Venture Partners USVP VII 12/01/99 $606.00
Sun Microsystems Sun Venture & Strategic Investment Fund 12/31/99 $600.00
Redpoint Ventures Redpoint Ventures I LP 10/14/99 $600.00
Source: VentureOne, Ernst & Young

One venture capitalist who didn't want to be quoted says that the latter five years of a fund can also see slowed activity. Since a fund's limited partners don't invest their entire committed amount at once, VCs always have to go back to them and justify the need to continue to keep a particular fund going, they say. One good way to do this around the five-year mark is to show that there's lots of potential for good returns in the fund's most recent investments.

Of course, as with all things economic, there are probably dozens of factors adding to one single trend. Indeed, it may just be that there's an awful lot of innovation going on right now and VCs are finding cool stuff to fund in the areas of network security hardware and last mile technologies, especially wireless LAN, according to Scott Rafer, a partner at Cycle Partners, a consultancy.

"LPs have been yelling and taking back their money for so long it's no longer a story," Rafer says. "There's a tremendous amount of Ethernet innovation going on and the price of Ethernet-connected devices is dropping like a rock."

— Phil Harvey, Senior Editor, Light Reading

echo2 12/4/2012 | 11:45:07 PM
re: Venture Uptick Coming? My options are going to make me rich!

LeCastor71 12/4/2012 | 11:45:01 PM
re: Venture Uptick Coming? I missed Native and Zettacom, that'll tach me for coming here after 18 beers.
LeCastor71 12/4/2012 | 11:45:01 PM
re: Venture Uptick Coming? You know what I found amusing...

I haven't heard of ANY of these companies... not a one!?

This tells me one of three things:

a) It's all first round (read as: all existing startups are f*cked)
b) It's really all outside of Optical and Ethernet (*still*)
c) I am out of touch

Post your votes here.


- LC
dodo 12/4/2012 | 11:44:59 PM
re: Venture Uptick Coming? a) "It's all first round (read as: all existing startups are f*cked)"

Corrections my friend;

Atrica is in the business since 2000 to develop Optical ethernet equipment.
This is their 3rd round to ensure the continuity of said development.

Kodeos: this is their second if I am not mistaken

Photnonics Control: same as Kodeos

and so on and so on.

Some VCs have fiduciary responsibilities to their shareholders and they pull the plug while some are plain stupid as far as technology is concerned without mentioning how and if they do scrutinize these business plans to go forward.
BlueWater66 12/4/2012 | 11:44:56 PM
re: Venture Uptick Coming? I'm wondering about the true dynamics of the venture market right now. I think for the next couple of years the model is broken.

In this market I'm not sure how any of the VCs are actually making any money. M&A is dead. Start-ups that received $100M are selling for $3M. It is almost impossible to give away assets. They aren't getting their money out.

For entrepreneurs, liquidation preferences continue to creep up. Most rounds now have a solid 2x or more Liquidation preference. The control provisions and anti-dilution terms are also terrible.

Both sides are in a terrible position and the public markets are starting to improve. Why would someone subject themselves to the abuse of the private equity crowd, when they can go to larger public companies and get stock options that actually have value and are liquid.

The VCs have to fight two battles:

1) Most entrepreneurs realize that equity is by far the most expensive way to raise money. After this down turn, they've seen how nasty and one-sided VCs can be. And they've seen how liquidation preferences and anti-dilution terms can destroy their life savings that were put into the company during its formation. So, most of the individuals I know who want to start another company are looking for smaller structures that allow angel funding or slower cash-flow based growth. They want control, because they've seen the ugly side of loosing it.

2) As the public markets recover, public company stock becomes much more attractive. Options based on those are worth something. Start-up are stuck with a terrible equity structure that is difficult to disassembly and rebuild. They loose their competitiveness compared to public companies. Plus, every employee who are been through this down-turn realizes that they have to look out for their own income first (the concept of loyalty has really been damaged).

My thoughts. I think the VCs are in for a terrible 2+ year period.

Soup 12/4/2012 | 11:44:51 PM
re: Venture Uptick Coming? Many VC's don't know as much about business as they pretend to. Some do, but most think that because they got lucky somewhere along the line that that makes them smart and business savvy. Often, it just is not so.

Don't expect VC's to be either business savvy or ethical. The engineer with the good idea needs to be hard-nosed with the VC's he's courting and say, "Hey, my ideas are worth as much as your dollars, so I get the same deal and protection you do." Remember, VC's are a dime a dozen but good ideas are few and far between.

Is there an uptick coming? The stock market certainly shows it in the public sector, and generally the private sector is 6 - 12 months behing the public in recoveries. Heck, I put substantial cash into telecom stocks in Nov 2002 and have more than doubled my money. As scared as most VC's have been these past two years, I think they'll see the writing on the wall that now is the time to put your balls back on and get in the game again.

Good luck to all,

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