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VC Funding Dips Again

Light Reading
News Analysis
Light Reading
1/28/2003

Can 2003 bring an uptick in the VC business?

The year 2002 certainly wasn't kind to the venture capital industry. Many venture investments looked like houses on fire with no viable exits. But though the numbers are brutal, there are still some optimists out there, and they say the quality of startups is improving all the time.

Venture capital investments in telecom companies during the final three months of 2002 dropped by about half from the last quarter of 2001, according to new data released by PricewaterhouseCoopers (PwC), Venture Economics, and the National Venture Capital Association. Venture capitalists invested about $562 million in telecom startups during the fourth quarter, compared to about $1.1 billion invested during the year-ago period.

For all of 2002, telecom-related startups raised about $2.9 billion in venture funding, compared to the $6.4 billion raised in 2001.

There were only about 60 first-time financings in the telecom space. That's the lowest total in eight years, according to Tracy Lefteroff, global managing partner of PwC's venture capital and private equity practice. This indicates that most of the money tied up in the space is going to sustain existing startups.

"The overall message is that if you are an entrepreneur, the bar has been raised on the types of ideas that will get funded," Lefteroff says.

"The quality of deal flow of new companies is way up, but the quantity is still very conservative," says Foundation Capital partner Bill Elmore, whose firm is still investing a $595 million fund. "For investors, the hurdle to make new investments is way up. We're taking months to make an investment decision and after we take that extra time, we're making a smaller initial investment."

"I don't think anyone should mistake patience for pessimism," says Elmore.

Company restarts also rose dramatically in 2002, making up about three percent of all financing rounds completed, according to VentureOne and Ernst & Young, which released their own venture capital numbers on Monday. There were 61 restart rounds reported in 2002, compared to just 30 restarts reported in the prior year.

(A restart round – also called a washout round – occurs when a startup's valuation is significantly reduced and its current investors' stake is diluted. Current investors that don't re-up get washed out.)

Corporate investors are in full-fledged retreat from the venture investing world. This week, in fact, Corning Inc. (NYSE: GLW) confirmed it is considering selling its Corning Innovation Ventures, a two-year fund that has invested more than $50 million in optical networking startups.

"I think we are seeing a bit of attrition" among VCs, says Jesse Reyes, a VP at Venture Economics. "It is rare that a VC firm simply closes its door and walks away, but we've seen the number of high net worth investors and corporate venturing groups dwindle down dramatically."

— Phil Harvey, Senior Editor, Light Reading

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Optical Headhunter
Optical Headhunter
12/5/2012 | 12:46:22 AM
re: VC Funding Dips Again
Perhaps you should read this from the San Jose Mercury News dated 1/28/03.
pipesoflight
pipesoflight
12/5/2012 | 12:46:19 AM
re: VC Funding Dips Again
last quote from the article.

``It's also not so prohibitively expensive anymore.''

What changed in terms of cost of living there? Did they get rid of state tax, lower auto insurance and cut housing costs by 2/3?

How much would a 2500 to 3000 square ft. house cost in areas where the high-tech companies are (say 25 mile radius)?
chipguy
chipguy
12/5/2012 | 12:46:17 AM
re: VC Funding Dips Again
last quote from the article.

``It's also not so prohibitively expensive anymore.''

What changed in terms of cost of living there? Did they get rid of state tax, lower auto insurance and cut housing costs by 2/3?

How much would a 2500 to 3000 square ft. house cost in areas where the high-tech companies are (say 25 mile radius)?

-----------------------

For one thing, the price of commercial real estate has dropped substantially over the last couple of years.

rjmcmahon
rjmcmahon
12/5/2012 | 12:46:17 AM
re: VC Funding Dips Again
How much would a 2500 to 3000 square ft. house cost in areas where the high-tech companies are (say 25 mile radius)?

It's way too expensive. It's another bubble which can't stand on the inflated "Henry Blodget" type appraisals, in my opinion. Watch out for when that goes pop.
pipesoflight
pipesoflight
12/5/2012 | 12:46:13 AM
re: VC Funding Dips Again
last quote from the article.

``It's also not so prohibitively expensive anymore.''

I forgot this was written from a top executive or company standpoint. With the large compensation packages I would agree that living in California would be no problem.
DoTheMath
DoTheMath
12/5/2012 | 12:46:09 AM
re: VC Funding Dips Again
pipesoflight>How much would a 2500 to 3000 square ft. house cost
in areas where the high-tech companies are (say 25
mile radius)?

rjmcmahon>It's way too expensive. It's another bubble which
can't stand on the inflated "Henry Blodget" type
appraisals, in my opinion. Watch out for when that
goes pop.

----------------------------------------------------

To answer your question, 2500 to 3000 sqft house is
in the "executive" category. Mere mortals settle for
1400-2000 sqft homes, and these range from $500K to
$650K depending on the area/school district etc. They
are about 5-10% down from the peak. High end or
"executive" homes have fallen 20-30% from the peak, which
may be why he thinks the area has become affordable :-)

In contrast to median home prices, which have fallen
only 5-10% from the peak, rentals have fallen by about
30-40% from the peak. Sunnyvale 2 bedroom apartments
go for about $1300 now, and they peaked at around $2000,
if you could get any at all.

Office rentals have *really* fallen. You can rent for
$1 - $1.50 per sqft/month now, and they peaked at $4-6
in late 2000.

Overall, I still consider this area expensive and the
taxes are way too high and going *up*. From a start-up company
perspective, rents are a *lot* lower, and people are
*available*. But Dallas, RTP etc are a lot cheaper.
BobbyMax
BobbyMax
12/5/2012 | 12:46:07 AM
re: VC Funding Dips Again
VCs know how to raise money but their wisdom which start-up company to chose is somewhat random choice. VCs are not members of the National Academy of Sciences and Technology. However, a lot of them behave as if they know about technology and marketing. It is far from true.

I have a lot more faith in doing the product innovation and R&D. VCs funded over 850 optical companies practically doing the same thing borrowing freely from similar companies.

The California's Bay Area is not a place where Universities teach telecommunications and networking etc. So it is a matter of immense surprise the VCs here continue to fund telecom, networking including optical networking companies. There is simply not enough talented workforce in this area. At the chip level, the start-ups follow the same pattern. This leads to chaos and confusion in the industry.

Over 90% companies have lost 90% of the market value. Trillions of dollars have been lost by the shareholders.

Since merit and qualifications are not the factor in chosing the leader of the start-ups. That is why we here tales of corruption in most of the companies. Unless we institute merit and qualification based hiring at all levels, the corruption and dishonesty would eat us alive.

Reforms will not take place as the CEOs, etc. do not read about ethics and morality.
rjmcmahon
rjmcmahon
12/5/2012 | 12:45:52 AM
re: VC Funding Dips Again
Since merit and qualifications are not the factor in chosing the leader of the start-ups. That is why we here tales of corruption in most of the companies. Unless we institute merit and qualification based hiring at all levels, the corruption and dishonesty would eat us alive.

Maybe we all can learn something from Elattuvalapil Sreedharan and New Delhi's new metro?

http://www.hindustantimes.com/...

When I took over the organisation, there was no office, no chair to sit on, no staff and not even a telephone. I operated from Rail Bhavan till a temporary office was organised. Building an organisation with the right attitude, commitment, dedication and work culture was a challenging task. Right from day one, a decision was taken to keep the organisation lean but effective. Unproductive layers of staff such as peons, clerks, stenographers, etc were eliminated.

Extreme care was taken in selecting each individual for the project team and the main criterion was a record of unimpeachable integrity. Today the Metro project team is only about 400 staff, executing a project of Rs 10,500 crores. The knowledge and expertise now available with this team will enable the country not to depend upon foreign consultants anymore for building Metros in any of our cities.
whyiswhy
whyiswhy
12/5/2012 | 12:45:50 AM
re: VC Funding Dips Again
BM, you really are an opinionated idiot, but I mean that in a respectful way of course!

Living in the Bay Area, being a CEO, and having gone to Berkeley and Stanford, I can tell you:

1) Cal, Stanford, SJSU, Santa Clara, HSU, Davis, Santa Cruz, SF State, USF, teach networking and telecommunications classes in their respective EE departments. The secret behind the sustained success of Silicon Valley is the large number of world-class universities within a 50 miles radius. We draw the best (top 1%) in the world to our universtities, then we keep the best of the best graduates (top 0.1%) in the Bay Area at our cutting edge businesses. The trick is stock options, aka, if the company gets rich, so do you.

2) As to workforce in the Bay Area, there are abundant, experienced photonics engineers, managers and executives "hanging out" at the golf course, Starbucks and 24Hour Fitness. Nobody is crying too much for them, they still have some money in the bank. Being Silicon Valley, there have always been an ample supply of experienced assemblers, and they are hanging out at the local employment development office. This does not lead to any confusion; it leads to frustration and anxiety about how they will feed their families. These are the people too feel for.

3) VC's and CEOs are a mixed group, ranging from crooked speculators to genuine philanthropists, technical goofs to PhDs. 99.9% are more informed about business and technology, and probably life in general, than you.

4) Yes, there were (and are) some crooked executive teams, VCs, investment bankers, auditors, etc. in the business, but the crooks and companies that made the news were public, far from start-up stage. You need to vent at the guilty people BM, and stop the broad categorizations. It just makes you sound ignorant, with an emphasis on rant.

5) The point of the article is VCs are NOT funding photonics start-ups these days, at least not at the same rate, and most certainly not under the same terms as they were earlier. I happen to think this is a great time to invest, but everyone to their own.

6) The one place I will agree with you is crooked executives, investment bankers, and auditors etc. should do hard time, in prison, and have all their assets seized...if found guilty. In other words, the law is lax on so called white-collar crime. So write your local politicians, or better yet start a petition, put an initiative on the ballot, and change the law.

-Why
netpert
netpert
12/5/2012 | 12:45:49 AM
re: VC Funding Dips Again

I have to agree with Bobbymax on this.

Most projects at mid/big VC firms are evaluated by associates or analyst types whose primary source of wisdom are newspaper or trade press articles written for non-technical readers. These analysts/associates have vague idea of technology at a very superficial level, but consider themselves above compared to even the best of IEEE or ACM fellows.

If you want to embarrass a Nobel laureate, ask him to run his research ideas through these VC analysts (without revealing their identities). All they are going to say that these ideas are useless, and of no value. And, it doesn't matter whether you are talking about GSM, VLSI chips, power reduction in semiconductor, or wireless optics, these analysts are Mr./Mrs. know all. They will practically reject any thing that is beyond their understanding without admitting their limitations. It is a different thing if a concept doesnGÇÖt get funded for business relationship. But most times, the talks donGÇÖt even proceed because the analyst types reject most ideas before they even get evaluated for business potential, and other related issues. All they look for the current trends that thay can understand.

At their own, VC partners have no idea of technology, or the merits or demerits of it. They mostly rely on the input of these associates before making certain decision (the smaller VCs depend on the lead of big VCs). However, if you have a person, well known to the investment community in your team, you may be able to bypass all these analysts and reverse happens. Even a stupid idea gets funded. ThatGÇÖs why you see so many serial starters with useless products getting funded.

So if you are a technology expert, you are unlikely to get funded unless you can add a smooth wall street or sales type smooth talker to your team. oo netpert
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