RealTime IT News

VCs See Little to No Improvement in 2002

NEW YORK -- This year will be just as difficult as 2001 for venture capitalists because of the uncertainty of valuations in the public market and accountability to their own backers, a panel of investors explained on Tuesday.

Speaking at the 2002 SIIA Information Industry Summit in NYC, panel moderator Ed Paisley described the session as a gathering of "survivors" but added that bleak market conditions will likely shut off the VC faucet until well into 2003.

"Usually, I'm the pessimist. But in this case, it's difficult being anymore pessimistic," said Paisley, managing editor of The Daily Deal.

In 2001, only 91 companies were able to complete an initial public offering, representing the lowest IPO volume in three decades, according to Paul Noglows, managing director at JPMorgan H&Q. And after coming to market, conditions didn't improve. Technology-related IPOs declined 45 percent on average in 2001.

Part of the problem is also due to a shortage of experienced VC investors. By 2001, the venture capital market had exploded to 980 firms, compared with 380 in the 1990s and less than 50 VC firms in the late 1970s, according to Pat Kenealy, managing general partner at IDG Ventures. As measured by volume, that means two-thirds of all venture funding ever raised have come over the last 10 years. But that only means that approximately 600 VC firms (the overwhelming majority) are dealing with their first real economic and market downturn, Kenealy observed.

"We see another year of triage...2002 will not be as hard as 2001 was but it won't be measurably easier until after 2003," Kenealy said.

VC will more likely turn to mergers or acquisitions as an exit strategy because of the discrepancies in perceived values of publicly traded technology (especially Internet) stocks, explained JPMorgan H&Q's Noglows.

"My day job has changed considerably...the last IPO I worked on was September 2000," said Noglows, a sell-side media analyst. "Our business has shifted significantly. There is much more of an M&A focus. [But there's] still serious questions about valuations."

To be sure, there are still signs of life in the capital markets for technology, even Internet-related, companies, added Howard Tullman, a self-described serial entrepreneur. But investors just need to keep in mind a few rules, namely "not to do something cheaply that you wouldn't do at all."

In other worlds, just because lower market sentiment has created buying opportunities, the business model and growth prospects still needs to be viable, Tullman explained.