"We were overweighted in services, and when that sector got hit our fund got smashed," says Gary Rieschel, executive managing director of Softbank Venture Capital. "We were also overweighted in Internet consumer and business-to-business, rather than core technologies."
Still, Rieschel pledges, "we'll have a few nice pops and even a couple of home runs." He's already told the fund's limited partners they can expect a return of 150 percent to 200 percent. That might sound like a good payoff, but funds typically have a 10-year life span. Doing even the more optimistic math means this comes to about 7 percent a year, which is barely better than a regular money-market account, despite the enormous risk inherent to venture investments during an economic slowdown.
Perhaps the biggest disappointment comes from Benchmark, a firm whose towering reputation gives it that much further to fall. The firm's success with Ariba and eBay sealed its reputation as one of the most successful VC firms of the late '90s. How, then, does it get lumped together with Hummer and Draper when insiders mention troubled VC funds?
Mainly because of the performance of Benchmark III, the firm's third fund. The fund raised $149 million in the second half of 1998, and then spent all that cash in nine months, a fraction of the three-year average before 1998. In all its other funds, Benchmark has invested in 21 networking-equipment and semiconductor startups, 10 software companies and another six firms in the wireless market - but fund III has only one investment in any of these categories: Collabra, a software company. The fund has three investments in networking services companies.
According to Lisson's data on Benchmark III, the partners invested in 24 startups, including Epinions.com and Living.com. By last fall, though, the fund was down to a portfolio of 18, half of which were in online retailing, with another three in the business-to-business sector. Four others have since gone out of business, including Great Entertaining and CharitableWay.com, representing more than $20 million in losses. Of the remaining companies, five have struggled with cutbacks and layoffs.
Benchmark partner Kevin Harvey denies that Benchmark III is performing poorly: "I feel confident that fund three will perform at the top of its class." He also says that Benchmark IV - raised in 1999 - is already proving a success with two public offerings.
|
Correction: An earlier version of this article should have stated that Benchmark Capital's third venture fund has invested in a software company, Collabra. Also, due to an editing error, the story should have stated that Benchmark III has no investments in networking equipment, and that the $10 million loss the fund faced on an investment in 1-800-Flowers was as of Sept. 30, 2000. Additionally, the story incorrectly stated that Tim Draper is an investor in Red Herring. |
