They talk about it at their children's school plays. They ask the question at Palo Alto power lunches: Who among them, the Silicon Valley venture capitalists wonder, will be first to turn in a lousy return for their funds?
It's a question no one asked in the boom times, but this is a very different world for VCs. Venture investing in the first quarter of 2001 was down 59 percent from record highs. Dozens of venture-backed dot-coms have gone out of business, and hundreds of others are still years away from profits. Funds that invested rapidly at the peak of the frenzy have seen the value of their investments fall 75 percent or more.
"There are some big-name funds out there in trouble, there's no question about it," says Kathryn Gould, an 11-year industry veteran and a partner at Foundation Capital, echoing a sentiment expressed by many VCs. "I hear it from our limited partners, who are invested in a lot of the big funds."
The limited partners - wealthy individuals, pension funds and college endowments that invest in venture funds for double-digit returns - are bracing for single-digit returns this year, well below the triple-digit returns seen in 1999 and even the average 27 percent return over the past 10 years. In the worst-performing funds, the limited partners could face losing the capital they originally invested.
It's no surprise that plenty of also-ran venture shops and incubators that popped up during the bull market are struggling with soured investments. Many limited partners sought out the top VC firms precisely to avoid such a risk. But some of those top firms - the ones that supposedly had the wisdom and experience to know better - made what now look like serious missteps at the height of the bubble. They often focused on dot-coms with little hope for profitability. Worse, they invested so quickly that they had little left over to nurture startups through the downturn that followed. Now Draper Fisher Jurvetson, Hummer Winblad, Redpoint Ventures, Softbank Venture Capital - even the undisputed superstar of the venture world in the second half of the 1990s, Benchmark Capital - are sitting on at least one problem fund.
| REPERCUSSIONS OF THINGS PAST | |||||||
| Several leading VC firms raised funds during the peak of the Internet bubble. But five - Benchmark Capital, Draper Fisher Jurvetson, Hummer Winblad, Redpoint Ventures and Softbank Capital Partners - were aggressive in investing much of their funds early in now-struggling dot-com startups. | |||||||
| FIRM | FUND | YEAR RAISED | AMOUNT (IN MILIONS) |
% OF FUND IN- VESTED |
% OF MONEY RETURNED TO INVESTORS | % OF COMPANIES FUNDED AFTER APRIL 2000 **** |
DIVERS- IFICATION FACTOR |
| Benchmark Capital | Benchmark III | 1998 | $149 | 100%** | 0%** | 53% | Poor |
| Draper Fisher Jurvetson | DFJ V | 1998 | $180 | 80%** | 24%** | 44% | Moderate |
| Hummer Winblad | Hummer Winblad IV | 1999 | $315 | 75%*** | N/A | 48% | Poor |
| New Enterprise Associates | NEA IX | 1999 | $871 | 65.1%* | 0%* | 68% | Good |
| Redpoint Ventures | Redpoint I | 1999 | $600 | 60%* | 0%* | 66% | Moderate |
| Softbank Venture Capital | Softbank V | 1999 | $600 | 100%** | 0.01%** | 50% | Poor |
| US Venture Partners | USVP VI | 1999 | $278 | 84.3%* | 0% | 55% | Good |
| *As of Sept. 30. **As of Dec. 31. ***Estimate. **** Excludes companies that have gone public or been acquired. Sources: Insider VC, Venture Economics and Venture One | |||||||
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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. |
