Back to the Future for Venture Community –

“With IPOs near-impossible, and strategic sales generally offering lower returns, venture capitalists are having to bide their time. This means more time devoted to keeping portfolio companies on a growth track, and, in some cases, more capital as well.”

The above quote appears of recent vintage, perhaps even yesterday, last week or a month ago. In fact, it was uttered in the fall of 1998, nearly three years ago, during a lull in the stock market, and just prior to the dotcom bubble.

When the venture capital community talks about 2001 as a return to normal, historic patterns, it isn’t kidding.

For veteran venture capitalists like Richard Kramlich of Menlo Park, Calif.-based New Enterprise Associates, the rise and fall of dotcoms was merely one volatile cycle in an industry that gets these temblors once every four or five years. “Venture capital is supercyclical,” Kramlich said. “It is also a great business.”

Despite a slowing economy, a tough initial public offering market and a difficult investment climate, VCs are rather bullish about their short- and long-term prospects. According to data from Venture Economics and the National Venture Capital Association, the venture community is sitting on an estimated $35 billion that has yet to be invested.

And while VCs aren’t in this business to sit on the sidelines, under the current environment most are comfortable walking away from a deal if the company doesn’t pass muster. (That wasn’t the case in 1999 and early 2000, when VCs had an inherent fear of missing out on the next big thing.)

But the question is, has the roller-coaster ride of the past 12 months actually made VCs too hesitant about potential new deals. To put it another way, are they losing the riverboat gambler mentality that the industry was based on?

Kramlich says VCs today have a “bunker mentality.” Firms are hunkering down with their current portfolio companies, while being exceedingly cautious with potential new investments. “There is a lot of money out there not being invested,” he said.

“The bar is obviously higher for companies getting funded,” added Alan Austin, a partner with Accel Partners. “We’re looking at as many deals as ever, we’re just not pulling the trigger as much.”

But many VCs at last month’s IBF conference in San Francisco said that while the number of deals has slowed, the quality of the companies being funded is much higher than in recent years. Venture Economics/NVCA research shows that fundraising will be much lower this year than last, but still strong when judged by historical standards.

“This is a great time to be an early-stage investor,” said Tim Draper, managing director at Redwood City, Calif.-based Draper Fisher Jurvetson. “We don’t know when the market will pop open again, but when it does, these companies that are being funded now will have had a chance to germinate.”

Still smarting from the dotcom experience, VC practitioners say they are returning to their senses, focusing on their existing portfolio companies and helping them grow into successful enterprises.

William Elmore, general partner with Menlo Park-based Foundation Capital, said that when history looks back at the ’00s, it will see 2001 and 2002 as breakthrough years, when some of the greatest companies of the decade will have been born. “It’s a great time to start a company, and the fruits of that labor will be seen in five to seven years,” he said.