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Venture Capital
Venture Capitalists Slowing Down

Debra Lau, 01.31.01, 12:30 PM ET

NEW YORK - Crosspoint Venture Partners took an unprecedented step while raising capital for its latest VC fund late last year. It told investors it changed its mind and didn't need their money after all.

The Woodside, Calif.-based venture firm, which backs technology startups, already had $1 billion in commitments for the Crosspoint 2001 Fund, but its partners wanted to spend more time on existing investments rather than seek out new companies to back.

Indeed, after getting burned by dot-coms, Crosspoint and other VC firms are slowing the pace of their first-round investments in companies, opting instead to spend more time and capital on existing companies that show potential to generate revenue and profits.

"These guys [VCs] had a big breakfast and a phenomenally big dinner," says Jesse Reyes, a vice president at data firm Venture Economics, a division of Thomson Financial. "And now they're pushing back from the table to digest what the heck they've eaten and figuring out whether it's going to give them indigestion or not."

Only 501 companies received a total of $5.1 billion in first-round funding during the last quarter of 2000, compared with 758 companies that got $8.5 billion during the same period in 1999, according to the National Venture Capital Association and Venture Economics (NVCA and VE). In contrast, VCs allocated a bigger share of their capital to follow-on investments. A total of 899 companies collected $14.7 billion in the last quarter of 2000, compared with 865 companies that obtained $16.9 billion during the same period the year before.

Enterprise Partners, an early-stage investor, is another one of many venture firms turning its attention to existing portfolio companies. The La Jolla, Calif.-based firm, which backs technology, telecom and biotech companies, used to carve out 30% of its venture funds for follow-on investments, but it has increased that amount to 45% to 50%, says Drew Senyei, a managing general partner. The reason? Its companies need more capital to survive, as the time it takes to prove their business models and reach an IPO has increased significantly since the market downturn in April 2000.

As expected, the tumultuous public markets, high valuations and a cooling in IPOs has led to an overall slowdown in venture investments in the fourth quarter of 2000. VCs spent $19.6 billion that quarter, compared with $28.3 billion the previous quarter, according to numbers released by NVCA and VE.

The industry raised about $100 billion last year, compared to about $60 billion in 1999. VCs still have about $35 billion, committed by investors, in reserve.

Overall, northern California attracted the most capital, getting 32.5% of all VC dollars in 2000. The greater New York area came in second, followed by New England. Surprisingly, however, only 80 new companies were funded in Silicon Valley in the fourth quarter of last year, compared with about twice that number the previous quarter, says Reyes. Average first-time rounds have also declined to about $11 million from $15 million a few months ago.

"The amount of new financings is putting a bit of a chill in the air for entrepreneurs," says Reyes.

But even those companies with a round or two of financing under their belts shouldn't assume follow-ons are so freely available. Bob Hoff, a general partner at Crosspoint, met with 40 of his 66 portfolio companies to explain that the investing climate had become more competitive. During that process, the firm decided against giving more capital to five of its portfolio companies, freeing up $170 million to spend from its Crosspoint 2000 Fund. The spurned companies did not convince the firm that they could generate revenue or turn a profit in the near future, Hoff says.

Crosspoint, an early backer of Foundry Networks (nasdaq: FDRY - news - people), Ariba (nasdaq: ARBA - news - people), Juniper Networks (nasdaq: JNPR - news - people) and Brocade Communications (Nasdaq: BRCD - news - people), made only two new investments in technology startups in the last few months, compared with twice that number in the third quarter of last year. The firm had about 15 IPOs in 1999 and was expecting 20 IPOs last year, but only had two.

"I don't think they've totally turned off the spigot [for first-time investments]," says Venture Economics' Reyes. "But they're being cautious, so most likely there'll probably be some good companies that don't get funded."


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