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VCs Turn to Triage

Light Reading
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Light Reading

Returns on venture capital investments have been abysmal during the past few quarters, and optical networking VCs are investing at a much slower rate this year. But the money committed to venture capital funds by institutional investors hasn't changed all that much since last year, when investments were pouring into the telecom sector at a furious pace.

VCs generally agree there is still plenty of capital earmarked for funding optical startups. The catch is it's hard to convince investors to take new risks -- they're too busy bolstering their portfolio companies.

The venture capital industry recently saw its first negative return for any 12-month period since the early 1970s, according to data from Venture Economics, a Thomson Financial Company. In its database, which tracks the performances of more than 1,400 venture capital and buyout funds, Venture Economics found that returns for all venture capital investments posted a 21.1 percent loss for the six-month period ended March 31, 2001.

And according to VentureOne, a division of Reuters that monitors the venture industry, VC investments in the communications sector, which includes optical networking, fell to $2.4 billion for the first quarter of 2001 from $4.1 billion for the year-ago period -- a 42 percent drop.

VentureOne data also shows that the size of the average venture round in the communications sector has dropped to $14.6 million in the first quarter of 2001 from $17.15 million in the year-ago period, a 17 percent drop.

"The solicitation effort for many of these funds actually began in mid 2000," explains John Gabber, director of research for VentureOne. "And with the change in market conditions they'll put that money to work more slowly than they did during late 1999 and 2000."

"I think it's universally accepted in the VC community that 80 to 90 percent of the private optical communications companies are going to die," says Brian Kinard, a partner at Blueprint Ventures. "I think what everyone's doing is waiting and seeing who'll survive."

And while the rate of investing slows, VCs are paying more attention to the firms they've already funded, helping nurse the sick ones back to health (and shooting the ones with broken legs). "All of us are revisiting our [investment] strategies," says Erel Margalit, managing partner at Jerusalem Venture Partners. "Some of the companies need more effort to identify what it takes to get them to break through with carriers."

One thing VCs are doing is raising annex funds -- funds aimed at sustaining portfolio companies that haven't gone public or been acquired. Specifically, New Enterprise Associates (NEA) and Accel Partners raised funds this summer to keep their companies afloat. New Enterprise raised a $150 million annex fund in June, and Accel raised a $75 million annex fund in July.

Amidst their pragmatism, though, venture capitalists are still scanning technology breakthroughs, always looking for a fresh horse to bet on. Looking ahead, Margalit sees potential in 40-Gbit/s long-haul systems and in FEC (forward error correction) technology to improve the quality of data sent through existing networks. He also notes that some technologies that haven't been commercially successful in the U.S., such as broadband wireless equipment, are starting to make headway in China and in parts of Europe.

Then there's the "faster, better, cheaper" argument. "Regardless of the economy, anything coming to market right now will be obsolete very soon," says Michael Duran, a partner at Patricof & Co. Ventures Inc. He says there's an operative principle, equivalent to Moore's Law in optics, whereby so long as the Internet keeps growing, carriers will be forced to build networks with faster transmission speeds.

Blueprint's Kinard says he sees opportunities in optical shaping (solving the problems caused by chromatic dispersion in optical networks); optical monitoring (measuring a signal's characteristics without degrading it); and automated manufacturing process for optical components.

- Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com Light Reading's subscription research newsletter service, Optical Oracle, recently analyzed the VC funding crisis and the state of private-company valuations in a detailed report called "Valuation Deflation." The report includes the estimated valuations of 57 private companies. For the full details, go to www.opticaloracle.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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12/4/2012 | 8:01:50 PM
re: VCs Turn to Triage
I think VCs have caused tremendous volatility in the technology markets. First they all ran towards DOTCOMS and caused massive bust. Then they ran for optical comunication, now that is bust. Is storage next ?

The only way to fix this is to require VC industry to be regulated by FTC and/or SEC.
12/4/2012 | 8:01:42 PM
re: VCs Turn to Triage
Oh man. You canGt be serious! Maybe you should switch careers and become a bureaucrat where things stay safer. If youGre going to be in technology then embrace volatility.
12/4/2012 | 8:01:40 PM
re: VCs Turn to Triage
Hey shut-up, you're blowing it!

I agree there should be some controls. You are absolutely correct about the DOT-SCAM, now SAN-SCAM. The business model for the VC has turned from the days of Art Rock when there was a real desire to build lasting companies with real revenue models, to spinflippers and puperdumpers. The IB community is just as bad: they fuel the VCs with way too much money. And the analysts that grease the works pretend to understand better than the industry itself.

Only solid business should be funded, but there is precious little of it out there to fund.

Are you trying to blow the game here, dude?
12/4/2012 | 8:01:39 PM
re: VCs Turn to Triage
The real irony is, the VCs have the balls to blame the dot-com entrepreneurs. Triage: If the VCs do continue to fund venture x, they want 80%-90% ownership, on the basis that they know better how to run the company than the founders. Picture a bunch of snotty punk VCs with crap in their portfolios, having the gaul to take that position: they can't run their own business worth a xxxx, so they want to run someone elses? Right! Good freakin' luck!
12/4/2012 | 8:01:35 PM
re: VCs Turn to Triage
What a great description of the VC business. You are right on the money. I can tell you know what you are talking about. Fully agree with you here.

If people look carefully at the resumes and bios of the VC partners they will know that we are dealing with some B grade mediocre players. These guys have not had a real job experience working at a real company before they became VCs. They have no track record of managing people, or projects of any reputable size at a reputable firm. THey failed at a real career so decided to jump to a VC career and come out on top of the food chain even with modicum of talent and experience.

Suddenly the VCs find themselves at the top of the food chain telling experienced founders and management teams what todo. And funny thing is that they have marketed themselves as heros of the economy while shifting the blame to founder and management teams. Even the press is unable to pick up on this small phenomenon that has crashed the economy twice atleast: DOT SCAM and OPTO SCAM.

12/4/2012 | 8:01:30 PM
re: VCs Turn to Triage
you guys are going on about this VC conspiracy theory again. DidnGt we deal with this last week?

If the system was really as bad as youGre making it out to be then it would have self-destructed long ago. It hasnGt. The system works, not perfectly but it works.

Own G everything else you post is great. Do you have a case of sour grapes dude or what?
12/4/2012 | 8:01:24 PM
re: VCs Turn to Triage
This is a totally stupid conversation.

The more VCs investing, the better!!!

Even if most of the investments don't pan out, it employs people (okay temporarily), it develops new technologies, and it's what has made the US a great place.

Any regulation will just make it that much harder for people with new ideas to get the funding they need. It will inhibit the economy stagnate technical innovation.

We don't need regulations to protect stupid people from getting burnt in the stock market....

12/4/2012 | 8:01:17 PM
re: VCs Turn to Triage
Le tme reply to the various objections that people have with VC's in this post.

1. They are B grade mediocre players

If they were why the hell is the market trusting them with $100m plus. There is no way that that could happen. If you think that you are better than the VC, then why dont you go raise $100m and then we'll talk.

2. They funded bad companies

Let me be clear here, 90% of us bought stock in many of those dud companies. Hey many of us even bought big mansions with the paper wealth. Hindsight is always 20/20.

3. VC's caused the dotcom bust

VC's did not cause the dotcom bust, just as they did not cause the irrational boom. They simply rode the wave.

4. VC's increase volatility

Now what actually do you mean by volatility. Do you mean the share price crashing down or the share prices skyrocketing. I think both constitute volatility. What you actually mean to say is that you lost a ton of money in the market and now want a scapegoat.

Now don't get me wrong, I dont work for any VC.

I agree that they made some silly decisions but that's all they were, mistakes. They were not scams (at least most of them weren't). If the VC's dont make money for their backers, they will get booted out or the fund will die.

The last thing that we need in this booming sector is government regulation.

That's my 2 cent's

12/4/2012 | 8:01:16 PM
re: VCs Turn to Triage
First a disclaimer: I work at a venture firm.

I've been reading the last few posts with some interest. I want to address a point someone made that VCs can't run companies better than the entrepreneurs and shouldn't try

This is true. But what is often missed here is that the partners at venture capital firms do not want to run companies.

VC firms look for companies with strong management teams--we could never manage a portfolio of companies if we had to run every one ourselves. Skillful VCs find strong management teams or help build them. This is the only way to succeed.

However, as a side note, many venture capitalists do come out of the industries they are now funding, and have great experience building companies themselves. The famous or infamous Vinod Khosla of Kleiner Perkins is a perfect example--he co-founded Sun Microsystems after all.

As a side note, the venture community, like any other group, includes smart people and gullible people; there are people who take advantage of others and people who get taken advantage of.

I'm certain examples of villainy or stupidity can be found, but I think the essence of the system is a wonderful thing. My job and the job of every VC is to direct money where it can do the most economic good. We exist to help ensure that good companies who can't find capital from banks or friends or any other method can still get the money they need in order to succeed.

A VC's money is expensive--it should be. These business are risky ventures. That's why they have a hard time raising money from banks or other places. A tremendous number of these companies fail, or "succeed" on a much smaller scale than initially projected.

But the reason they are around at all is because venture capitalists have been willing to put money at risk to help them grow.

The system is not perfect. But what system is? I've read numerous complaints about how the world of large corporations is disfunctional, but no one would suggest that Cisco or Lucent or Marconi are bad for society or the economy.

Well, neither are the much-maligned VCs, says one of their ilk.
12/4/2012 | 8:01:15 PM
re: VCs Turn to Triage
The first thing to do is to drive the dumb analyst out. I am not who are the morons who actually listen to them.

Do the analysts take responsibility for what they say? Or they just move on to destroy another company?
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