back to notes

Venture Firms Clutch Purse Strings

22 May 2002: | Wall Street Journal B.7F. | By Johnathan Burns.

Roland Van der Meer and the folks at ComVentures saw the recession in communications-equipment spending coming more than 18 months ago. They just didn't think it would be this bad.

Luckily, the Palo Alto, Calif., venture- capital firm already had trimmed its portfolio of start-up companies. "We saw the whole world was changing, so we shut down four or five companies back then. [And we] did some rationalization on companies that we just didn't think would work," said Mr. Van der Meer, a general partner at ComVentures, which manages more than $1.2 billion in capital. "Since then, the market has only gotten . . . a lot worse."

Indeed, investments in closely held communications and media companies have continued to sink. During the first quarter of this year, roughly $939 million was invested in this sector, the lowest amount in more than three years, according to the National Venture Capital Association. Exit strategies through sell-outs to larger companies or initial public offerings have been scarce.

As a result, venture investors specializing in communications have hunkered down, clutching tightly cash needed to survive the recession while stifling the start-up mouths they have to feed.

Even so, many believe some venture-capital firms specializing in communications will still end up closing during the next year or two. At the least, the survivors already have seen their early-round investments in start-ups become almost worthless. "It's the beginning of the drought here," Mr. Van der Meer said. No firms of substantial size have yet closed their doors, likely a result of the influx of cash that flooded the communications sector in 1999 and 2000.

In 2000 alone, private investors pumped $13.8 billion into communications and media start-ups, according to the National Venture Capital Association. "Most VCs had raised large amounts of capital in anticipation that the rate of investment would stay at the same pace before the market correction," said Jeanne Metzger, the industry association's vice president.

That rate of investment changed when the public markets spiraled, all but killing the IPO market and squeezing formerly high-flying public companies that had used their pricey stock as currency to acquire start-ups.

"In the telecom space, [investment firms] were sitting on portfolios that, when they invested, had high valuations," Ms. Metzger said. "When the market crashed, those valuations had to be marked down and the VCs had to triage their portfolios. The weaker companies that didn't make sense were shut down."

The remaining companies that don't face being sold immediately have been put on tight budgets. "VCs are working with companies to help them cut down their cash burn rates," Ms. Metzger said. "Remember, under normal terms it takes between five and seven years to build a company from inception to where it's profitable."


last updated march 2020