Four first-time venture funds raised during the Internet bubble have quietly stopped doing business, and at least one market analyst predicts the record number of brand new firms started two years ago could shrink by one-third.
The latest victims are Seattle-based Incepta, a Bechtel Enterprises Holdings-backed firm; New York City firms StartingPoint Venture Partners and Metropolis Venture Partners; and White Plains, N.Y,-based iCentennial Ventures.
In each firm’s case the reasons for getting out of venture capital are the same: The first-time funds, raised in 1999 or 2000, have dismal prospects, and the only thing with worse prospects is the chance that the small firms will be able to raise another fund.
“The youngest guys in the industry with the least experience are going to be at the very bottom of the Darwinian feeding chain,” says Jesse Reyes, vice president of market researcher Venture Economics (publisher of Venture Capital Journal).
A total of 666 venture funds were raised in 1999 and 2000, and 22% of them were brand new funds. So many fund managers were out raising first-time funds in 1999 (89 of them in all) that they eclipsed the previous record high for brand new funds that was set in 1995 with 40 new vehicles, according to Venture Economics. It didn’t stop in 2000, when 63 first-timers closed on new venture funds. You have to go all the way back to 1983-84-when a hot IPO market spawned 34 first-time funds in each of those years-to find another fund-raising boom that ran over two years.
While it’s too early to predict with any certainty how many first-time funds will fail, a good guesstimate is about one-third of the total, or as many as 50, Reyes says. But he adds that any one of the bubble-year funds could pull it out in the bottom of the 9th. “The good thing is when you swing for the fences you may hit a home run,” Reyes says. “But not everyone can be Babe Ruth.”
A visit to the StartingPoint Web site advises the following: “StartingPoint is currently not accepting business plans or resumes.” StartingPoint partner Eric Vincent says the firm is still monitoring its five active investments, but it is not “in growth mode.”
Watch the Monitor
“We are not raising new capital,” Vincent says. “We are monitoring our portfolio, and are looking to ensure that we get as good a return as we possibly can.”
StartingPoint invested about $8.1 million of its 2000 vintage fund in a variety of early-stage companies, including BevAccess.com, Mirror Worlds Technologies, onExchange, SandCherry Networks, ShipLogix and WatchPoint Media, according to Venture Economics.
StartingPoint has enough cash in reserve for follow-on rounds for its companies, Vincent says. The partners also have enough time on their hands to return to what they were doing before launching a venture fund. In Vincent’s case that means managing a hedge fund. For the other partners, former investment banking heavy-hitters, it’s a return to their own private investing, Vincent says.
The partners at Metropolis Capital Management have likewise returned to their previous financial roots and are looking to invest what remains of their limited partners’ capital in other asset classes.
Metropolis Venture Partners was founded in 1999 as a partnership within Metropolis Capital Management and at the time was looking to raise a fund of $75 million. The firm invested what money it did raise in such companies as Luxcore, an optical networking company, WeComm, a wireless and mobile data service provider, and B2B exchange Aluminium.com.
One fellow who described himself as an “office squatter” answered a call to the New York office. Other partners were busy elsewhere, most-it seems-at the U.S. Open. One was reached by cell phone at courtside. “I am trying to watch the tennis,” he said. He politely called back later but declined to answer any questions about the firm.
That was more than a search for iCentennial yielded. ICentennial has disappeared along with its investments in B2B marketplace companies like MicroPortal.com, TradeOut.com and RentPort.com.
No one at RentPort, an online credit and criminal check service for apartment owners, and the only iCentennial investment seemingly still alive, knew what iCentennial CEO Alan Klingman was up to. A visit to Klingman’s Web site only returned the message: “Welcome to iCentennial Investments. This site is currently under construction.” Under water is perhaps a more apt description.
The Harder They Fall
The largest of the expired VC firms, Incepta, was launched in 1999 by the investment arm of engineering and development giant Bechtel Group to invest in telecommunications technology companies. While it was not the first time that Bechtel had invested in venture capital, it was the first time Bechtel created its own VC fund.
All but three or four of the 19 Incepta employees will be laid off, and the Seattle office will be closed, says Bechtel VP Jeff Leichtman. Several of the Incepta VCs will be kept on the payroll as consultants, including Incepta Managing Director John DeFeo. The few Incepta employees being kept will return to the bosom of Bechtel in San Francisco.
“What we’re seeing is a significant reduction in investment opportunities,” Leichtman says. “As a result of the market, we are scaling back our activity in the telecommunications business over the next 18-24 months. As a result of that we are bringing Incepta back inside Bechtel.”
Belly of a Whale
Bechtel fully funded the first of Incepta’s two funds. The second fund has two other LPs in addition to Bechtel, which Leichtman declined to name. Leichtman also would not disclose the total size of the two funds. What he would say is that the funds invested about $140 million in eight companies (an average of $17.5 million each) since 1999. The companies are located in Europe and North America and are focused on last-mile technology and selling integrated voice, video and data services in specific geographic markets. The companies include EON, Fulcrum Technologies, Javelin Connections Holdings, OnFiber Communications and Star 21 Networks.
The only comfort Incepta and the other nearly expired venture firms have is they are neither the first nor likely the last to shut down. Corporate VC firms have already been killed off by their parent companies by the fistful, and other high-profile firms like Netscape founder Jim Barksdale’s Barksdale Group have also foundered. Ta-Lin Hsu, chairman of H&Q Asia Pacific, also predicted in the May issue of VCJ that the total number of VCs would be reduced by a third in the coming years. The way it looks now, even that pessimistic outlook might be a bit optimistic.
Additional reporting by Lawrence Aragon.
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