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Funding for startups

VC Activity Continues to Crawl

Think venture capitalists might be ready to inject some cash into the sputtering technology economy? Think again.

The venture capital business continued a two-year slump during the first quarter of this year. The money invested by VC firms decreased significantly, as did the number of deals and the amount of money poured into VC funds by limited partners.

Networking equipment companies, including data communications and fiber optic equipment manufacturers, raised $899 million in 66 deals during 1Q02, according to the MoneyTree survey published by PricewaterhouseCoopers, National Venture Capital Association, and Venture Economics. A year ago, that sector attracted $1.99 billion in 114 deals.

The telecommunications sector, which includes wireline, wireless, and satellite communications companies, raised $722 million in 87 deals, compared to $2.31 billion in 165 deals a year earlier, according to the MoneyTree survey.

The companies that did raise large rounds of funding during the first three months of 2002 often did so after firing employees and washing out their earliest investors (see Washout Rains $53M on Pluris and Caspian Starts Fresh With $120M).

Table 1: Largest Financings of 1Q02
Name Stage of Development Amount Raised
Caspian Networks Expansion $120,000,000
Chiaro Networks Expansion $80,000,100
Atrica Inc. Expansion $75,000,000
Turin Networks Inc. Later Stage $58,000,000
Polaris Networks Expansion $55,000,100
Pluris Inc. Later Stage $53,000,000
P-cube Inc. Expansion $40,000,000
Source: PricewaterhouseCoopers, Venture Economics, National Venture Capital Association


Money coming into venture capital funds was scarce, too, compared to previous years. Limited partners only committed about $2.3 billion to VC funds in 1Q02, the lowest quarterly amount on record since the third quarter of 1996, according to VentureOne.

Table 2: Commitments to Venture Capital Funds
Quarter Amount ($M)
1Q02 $2,252.00
1Q01 $18,403.60
1Q00 $16,660.27
1Q99 $7,906.55
Source: VentureOne


Along with fewer commitments to their funds, VCs are feeling increased pressure from limited partners regarding the gigantic management fees they draw down, even on funds that they don't fully invest. Kleiner Perkins Caufield & Byers and Accel Partners are among those VCs that have recently chopped the size of their funds (see VCs & Startups Go to the Mat ).

Blueprint Ventures sent a memo to its limited partners in mid-April saying that, due to concerns about the VC business, they were working to reduce their management fees. "Again, our mandate is simple: increase returns to our investors in this difficult time," states the memo, which was leaked to the media.

"The industry consensus is that we are either at or near the bottom -- that's the good news," says Steve Bengston, managing director of emerging company services, at PricewaterhouseCoopers. "The bad news is that most don't think it will go substantially up from there until the next boom emerges."

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
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skeptic 12/4/2012 | 10:26:15 PM
re: VC Activity Continues to Crawl
The situation is probably worse than it seems.
In at least one case (Caspian), they didn't
(supposedly) raise the quoted figure. They raised
a much smaller amount in up-front cash with
the rest being conditional based on meeting
company performance targets. And counting
future promises from VC's rather than cash in
the bank distorts the whole picture of VC
investment.


NMSgoddess 12/4/2012 | 10:26:14 PM
re: VC Activity Continues to Crawl on 5/8/02 in the dallas news business section ypu will find an article called "Venture Firm Stays Optimistic". It didn't name names but painted a fairly glowing picture of startups that were going to be funded.

I agree with LR on this one, the start up recovery isn't going to be for a while. I would like to know what series A companies are being funded right now. Not months from now, but right now in Dallas.

Call me impatient, but I can't help myself.

NMSGoddess.

raid 12/4/2012 | 10:26:13 PM
re: VC Activity Continues to Crawl Is there a legal requirement to disclose the terms [strings attached] of the VC investment to the common share holders (i.e. employees) ??

I suspect that there is no such requirement, legally. Employees should watch out and keep our eyes/ears open - rather than blindly beleive the management.I hope all of us learnt this from the message boards here lately.


-raid
DCITDave 12/4/2012 | 10:26:13 PM
re: VC Activity Continues to Crawl I think Alan and I are telling the same story in a different way. Because of the softness in the startup economy (my article), the startups that are looking for funding are toning down the rhetoric and providing more realistic business plans. This makes VCs optimistic because they don't feel rushed to invest and the quality of deal they're seeing is improving (his article).

I was, however, disappointed that Alan resisted making a joke about how thin the air is on floor 16.
toohideous 12/4/2012 | 10:26:12 PM
re: VC Activity Continues to Crawl No, I don't think there is any requirement to disclose to general employees the full terms of the funding agreements...

YES I agree people should watch out for themselves. It's amazing to me how people don't seem to learn from the past. Hopefully people are noticing the Accordion thread and taking action to protect themselves.

You can do a lot for your company but in the end the only one looking out for you is you....

-th
LightGaugeGuitarString 12/4/2012 | 10:26:09 PM
re: VC Activity Continues to Crawl No, employees (common shareholders) have no legal right to have the terms disclosed. They have a (increasingly diluted) percentage stake in the company's equity, that's it.

All decisions regarding financing terms are between the board and the financiers.

LGGS
DKP 12/4/2012 | 10:26:09 PM
re: VC Activity Continues to Crawl > Is there a legal requirement to disclose
> the terms of the VC investment to the
> common share holders (i.e. employees)

Employees are usually Option holders. As option holders, they are not entitled to any exposure to terms. Even as Common holders, if that class of stock needs to approve the deal, the terms are not always sent out to all shareholders, just the major ones to get majority approval.

If employees realized how "squeezed" their Common shares become in a down market, they would not be happy. But then, they did not put up the money to fund the company, but rather took money out of the company in salary. I have grown to appreciate how much risk VCs take, and they desire the downside protection that employees do not have.
NMSgoddess 12/4/2012 | 10:26:09 PM
re: VC Activity Continues to Crawl Phil-

Thanks LOL.

NMSGoddess.

rjmcmahon 12/4/2012 | 10:26:06 PM
re: VC Activity Continues to Crawl But then, they did not put up the money to fund the company, but rather took money out of the company in salary. I have grown to appreciate how much risk VCs take, and they desire the downside protection that employees do not have.
_____________

Give me a break.

Never forget that capital comes from the fruits of labor.

VCs risk only 1x the money, most of which is not even theirs but rather a social inheritance. Many VCs today are sitting on that inheritance and taking the management fees for their personal salaries. 7 of 8 have never met a payroll and never will. Even less have labored sufficiently to justify what they take.

Employees risk their time and commitment, both of which money can never buy. Their salaries are paid after they labor and not before. It's not their fault if that labor doesn't create more wealth for a company.

Venture capital has the obligation to take a simple risk. If they are afraid to risk 1x the money they should buy government bonds and leave the VC business.
RouterOttawa 12/4/2012 | 10:26:00 PM
re: VC Activity Continues to Crawl The subject says it all...
Signed...
just asking
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