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What Are VC’s Doing for a Living?
VentureWire released its quarterly VC investment statistics a few days ago and the news was… even further declines in portfolio company funding. For 2003Q1, VC’s put to work $3.4 billion versus $6.2 billion during this quarter last year. The trend is also well down from 2002Q1’s $4.9 billion. The pace of deal closings have now reached mid-1990 levels and “… there are many fewer active venture capitalists,” according to VentureWire’s Ken Anderson.
Some analysts point to biotech funding as a relative bright spot, but this sector has hardly escaped the depression. VC funding for these sorts of early-stage players is off 40% compared to last year. “People are calling it the nuclear winter for early stage life sciences,” says Don Grimm at VC Hamilton Apex.
April's CFO magazine chimes in by noting that only 1% of all VC deals funded in 2002Q4 were for start-up or seed stage companies. In contrast, 65% of the deals done in this period were for expansion of already-established businesses.
So one may ask: what are VC’s doing for a living these days? Well, they’re busy trying to figure out what to do about their earlier investments. An unnamed VC has recently stated that he believes -- of the estimated 6,000 IT companies receiving VC investment before the dot-bust -- about 200 will prove profitable, or about 3%. (For more detail on the VC's "walking dead" portfolio company predicament see our November Dispatch.)
He also estimates that another 200 of these investees could be made profitable, but only when a single investor entity takes control. Investor control is particularly important when entrepreneur managers may be tempted simply to retain their jobs while continuing to burn cash.
Problem is, many VC’s took minority positions, bowing to management or simply participating in a complex equity structure with no single group wielding control. Control is more usually associated with buyout group structures, which we therefore expect to see more of in the future.
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