![]() ![]() Some venture capitalists talk of companies being closed down, even though they had viable operations, because their cash balances were regarded as being more valuable. This carries its own risks for the surviving companies financed by venture capital. "We've been selling, cutting and shutting down." "We've spent the past three quarters in triage," admits Mr Rosemary Remacle, a venture capitalist at Sevin Rosen in Palo Alto. But most venture capitalists appear determined to struggle on and are having to cull their portfolios. ![]() In April, Octane Capital Management returned $130 million to investors. Some funds have handed back cash to their investors rather than risk the destruction of further value. "Negotiations are really fraught," says Mr Shahan Soghikian, a partner at JP Morgan Partners, a late-stage investment group. But such investors are demanding increasingly tough terms. Venture capital groups traditionally tried to bring in late-stage investors to support companies until they were ready to go to market. "The technology economy is absolutely in recession," says Mr Philip Sanderson, a general partner at Walden VC, based in San Francisco. The other way of generating a return - a trade sale - is also blocked. The discontinuity is causing real pain among the venture capitalists." "It could be that companies now go to market not after 12 months but after three or four years," says Mr Brad Koenig, managing director of west coast investment banking at Goldman Sachs, "There are no companies out there that fit the profile. Only 13 venture-backed companies have gone public this year, according to Mr Tracy Lefteroff, global managing partner of the venture capital practice at PwC. The market for initial public offerings is now moribund. There was too much money out there," says Mr Jim Seaberg, a principal at consultancy Mckinsey & Co. "Quality control went right out of the window. No wonder investors feel disillusioned," says Mr Dunlevie at Benchmark. "Look, people were setting up dotcoms not just for food, but dog food, and not just dog food, but Scottish terrier dog food. Investors who have lost money are increasingly unwilling to commit more capital to start-ups. That compares with $24 billion invested in the same quarter last year. The figures show investment in venture-backed companies down from $10 billion in the first quarter to $8 billion in the second. Since then, the industry's plight has deteriorated further, according to data released this week by PricewaterhouseCoopers (PwC) and VentureOne. Mr Nawn calls the first quarter of this year "a nuclear winter. If you look at just one sector, the optical space, there are 300 companies that will need between $20 billion and $40 billion to sustain them. There will be an $80 billion shortfall in funding during the next 12 months alone. The scale of the impending crisis should not be underestimated, warns Tae Hea Nahm, a partner at Storm Ventures in Palo Alto. Venture capital has provided a bridge between the private and public markets, ushering in new companies and technologies. There is a danger that technological innovation, which provided the productivity growth underpinning the US economy during the 1990s, could falter. If that happens, the ramifications could go far beyond the venture-capital industry and the privileged world of Silicon Valley. Mr Nawn expects many venture capital groups to go under, the bulk of client companies to fail and investors to lose huge sums. The venture capital industry is facing a cash crunch, with investors increasingly reluctant to put money into the sector, while companies in which they have invested burn cash.
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