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
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
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
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.