- The Washington Times - Tuesday, August 21, 2001

As many as a third of U.S. venture-capital firms will fail in the next six months because of losses stemming from the dot-coms' collapse, according to a survey of Silicon Valley and East Coast venture capitalists.

Seventy-eight percent said they expect 10 percent to 33 percent of venture-capital firms to fail, found a Deloitte & Touche LLP survey of more than 2,000 venture capitalists managing funds with assets exceeding $50 million.

Two-thirds of the venture capitalists surveyed said they expect that it will be difficult in the next six months to raise new funds.

"What that means to an entrepreneur looking for funding, is to be careful to pick someone who can bring something to the party, [a venture-capital firm that] is out there for the long term," said Will Frame, founding member of Deloitte & Touche's corporate-finance team in San Francisco.

Hundreds of new venture-capital firms were founded along with technology start-ups in the late 1990s. In 1999, new funds accounted for about one-fifth of all venture capital raised, according to the National Venture Capital Association (NVCA) in Arlington.

Since last spring, however, some venture funds began having difficulty raising money, and stopped making new investments, NVCA data show.

John Taylor, vice president of research at the association, said he is not aware of any local funds closing. He said funds don't just close their doors overnight, but find themselves unable to raise money after making investments that did not pan out.

Cautious investors gave older venture-capital funds the most money during the first six months of this year, according to the NVCA.

Nearly half 49 percent of venture funding was raised by firms with more than 11 years of experience. Funds at ages two to five got nearly 30 percent of moneys, and only 5.6 percent went to firms with only one year of experience.

"Institutional investors, who are the ones who put most money with venture funds, are becoming much choosier about which venture funds they invest in," Mr. Taylor said. "They are overwhelmingly choosing to put money in venture funds that did well in the last downturn, which was 1990-1992."

Larry Macks, general partner at Boulder Ventures and board member of the Mid-Atlantic Venture Association, called the situation "Darwinism at its best in the venture-capital business."

Boulder, started in 1995, just closed its fourth fund for about $150 million, and has shown its investors good returns from earlier rounds, said Mr. Macks.

He also said Boulder is looking for new investments, which puts the firm in the same category as 41 percent of respondents, who said they are seeking new ventures.


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