Grim Outlook for VC Following Attacks –

SAN FRANCISCO – Like many in the financial world trying to make light under the collapsed shadow of the World Trade Center, the mood among venture capitalists is grim. While many spent the days following the Sept. 11 attack in triage, making contact with friends and colleagues, some already have begun to worry the disaster will push the stumbling economy over the brink and into recession with possible long-term negative consequences for the private equity market.

In the coming months, the pace of venture investment is likely to slow, with valuations falling, and exit opportunities scarce, investors say, with the private market just steps behind a plunge in the public stock market.

“Certainly the indicators to date, and as of yesterday, Sept. 11, have come down,” said Jim Gunton, general partner with the New Jersey Technology Council’s venture fund and a former partner at Edison Venture Partners.

Economists at Wells Fargo Inc. have likened the atrocities to Iraq’s 1991 invasion of Kuwait. That event caused an immediate surge in oil prices, a plunge in stock markets worldwide and a drop-off in consumer confidence. While the U.S. cycled into a recession during the Gulf War, today’s outlook is similarly bleak, but uncertain.

“What does it mean to us to internalize terrorist threats as a nation and what does it mean to the economy?” asked Doug Breckel of the University of Washington’s treasurer’s office in Seattle. “I’m more concerned about the economy than this terrorist act. But, is there a potential for a downside? Sure. Will it be significant? Will it have material consequence? We don’t know.”

With unemployment at an eight-year high and corporate earnings falling short of expectations over the last two quarters, conditions are ripe for a recession. Forecasters at the University of California at Los Angeles said the economy is at the brink of a recession, worsened by weak corporate spending and a slowdown in the technology sector. Venture investors, too, are fearful.

“There’s a general danger of recession, which affects private equity because private markets follow public markets, but I’m on the fence,” said John Repko of Colorado’s Vista Ventures. “The Fed will open up lines of credit and make money available to the financial institutions, so that’s the buffer in the macro sense. In the micro sense, when places have disasters they typically see a boost in spending.”

Whatever the cause, in a recessionary environment, not only will capital-raising be difficult for private companies, but fund raising among venture firms also may trickle to a standstill, leaving many portfolio companies dry. Lacking capital for growth and profitability, some could even be forced to shut. And, with a fall in the public markets, valuations for new investments may hit new lows.

If, the Fed is successful in curbing fears of a recession and the public markets sustain their losses, the private markets may witness some short-term gouging, but no serious long-term effects, said Ken Elefant, a senior associate with Lightspeed Venture Partners.

While optimists take their place along the naysayers, without any clear direction from the public markets and the national economy virtually shut down, speculation is only speculation.

Members of the National Association of State Retirement Administrators (NASRA), the National Council on Teachers Retirement (NCTR) and the California Public Employees’ Retirement System (CalPERS) had each urged investors to remain calm to prevent a market meltdown widely anticipated by Wall Street analysts.

In their statements, CalPERS, NARSA and NCTR supported the efforts of federal and stock market officials to reopen markets in an orderly fashion. They expressed confidence in the markets and in the underlying strength of the national economy and, as long-term providers of capital, pledged to provide stability to the financial markets. They also extended condolences to victims’ of the attacks.

With $155 billion under management, and 6% of its portfolio dedicated to private equity, CalPERS is the nation’s largest public pension fund. NASRA is a network of 50 state employee retirement systems, while NCTR includes 75 teachers’ retirement systems.

It is too early to accurately gauge the effects of the WTC and Pentagon tragedies on the private equity market, but, if the ominous signs from international markets and the public’s jittery anger remain on course, the venture world’s grim outlook may be the clearest indication of things to come.