Year-End Review Pieces Hold Few Surprises, Say 2009’s Looking Lousy, Too

From the Wall Street Journal:

Venture capitalists got squeezed by the financial crisis in 2008. That squeeze is likely to continue in 2009.

Returns for these investors, who invest in start-ups with the aim of profiting when the companies go public or are sold, got crunched last year by a dearth of initial public offerings of stock and few mergers and acquisitions. The outlook isn’t much brighter, as the recession is likely to continue to weigh on the IPO and M&A markets.

Meanwhile, the venture industry’s investors, such as pension funds or university endowments, were hurt by gyrating markets, crimping sources of funding. Some venture-capital firms are having a tough time raising new money, which will affect the pace of new investments this year and may call into question the survival of some venture firms.

“The economic turmoil will engender a fair amount of Darwinian change,” said Mark Heesen, president of the National Venture Capital Association, a trade group. He calls 2009 “a year of anticipation for the venture-capital industry.”

From the New York Times:

A decade of too much money and dismal performance has finally caught up with the venture capital industry. Only a few well-connected firms can now raise money. This means higher returns for the survivors, but tougher times for most investors and start-ups.

Venture capital firms currently manage some $260 billion, or 14 percent more than they did during the waning days of the Internet bubble in 2000. The glut of capital ensured pitiful returns for a decade. Money was wasted on below-par ideas. Competition was fierce, so promising companies received ludicrously favorable terms.

For funds established since 1998, the best-performing fund vintage was 2002 — and it returned a measly 5.7 percent, according to Cambridge Associates, an investment adviser. In many years, funds posted negative returns.

Reeling equity markets worldwide have put an end to the cash gusher. Only 55 firms raised new capital last quarter, down 30 percent from the year before. And firms that were unable to sell portfolio companies in 2006 and 2007 probably haven’t had a single sizable exit since 2000. That could make raising new money nearly impossible for many firms.

The industry’s best-connected firms, however, still seem to be able to find investors. Sequoia Capital, which financed Apple and Google, raised $930 million for a new fund in September. And this month Accel Partners, the firm behind Facebook and RealNetworks, raised two funds totaling $1 billion.

The V.C. crash will eventually mean higher returns for the survivors. They will have their pick of ideas and won’t have to enter bidding wars with lesser firms.

But as the number of new venture funds decreases, investors will find it harder to get access. And start-ups will find that, with less competition, deal terms will be tighter. The coming years are likely to be tougher for both venture capitalists and the companies they seek to finance.

From peHUB:

Personally, I think the venture industry has been in crisis for the past few years, and that we’re entering a newer, better era in 2009. The big firms will continue to throw money at a lot of ideas, a small fraction of which will keep them in business for a long time to come. The late ’90s firms that are hanging on by their fingernails will die or merge. And a spate of new, but far smaller funds, will begin to appear. I wouldn’t call them microfunds, but they won’t be big enough for their investors to grow rich off management fees alone, either. (In fact, most will be led by people who are already independently wealthy thanks to their own successful track records. Think of the Mike Maples model.)

Life for entrepreneurs will be more challenging. My guess is that they’ll need to be at or near profitability to raise money from most investors. I think there will be a continuing drumbeat of Web 2.0 companies forced to shut down the works, and I think the pace of investment will slow dramatically, as LPs ask VCs to chill out a bit.

These are good things. It’s time for some change.