There was a time when a venture investment in a tech company was, if not a sure bet, certainly a reasonable wager. Some returns were quick and high. But now, this once high-flying opportunity compares unfavorably with the biotech and medical segments.
In fact, 3-month and 1-year returns on a high-tech investment have fallen into negative numbers, mirroring the overall trend. Venture capitalists haven't seen negative numbers on their returns since the early '90s, according to New York-based research firm Venture Economics. But returns have been tumbling since late 1999 [see ELECTRONIC BUSINESS, April 2001, page 27] and really hit the skids the first half of 2001 when they became negative for two consecutive quarters. According to Venture Economics' performance index, the preliminary 1-year return for a venture capital fund was -18.2% at the end of Q2 2001.
That trend, says Mark Heesen, president of the National Venture Capital Association, Arlington, VA, was expected to continue through the end of 2001.
How should the investment market view these statistics? With a little perspective, Heesen advises. Prior to the recent negative numbers, VCs were seeing triple-digit positive returns. "The triple-digit [positive] returns were not realistic, and the negatives are not realistic," he says.
For the first time, Venture Economics is tracking ROI by industry segment. High-tech continues to be a positive investment, if you're willing to wait three to five years. In the short run, the new promise of the venture community appears to be the life sciences sector, particularly biotechnology, which showed the only positive return in the last 12 months.
Low market valuation trends, particularly in the Internet and technology sectors, have contributed to the negative returns. The decline in the Internet sector was not all that surprising to investors, Heesen notes, adding that sector was more like a land grab where VCs hoped to invest in that one dot-coin, out of the many, that would be successful.
Levels of investment, Heesen says, probably will remain lackluster. Some venture capitalists won't continue their investment in under-performing companies as long as they're uncertain when the IPO market will bounce back. The acquisition market isn't looking very positive either, he adds. VCs will hold on to those companies that they think, in the long run, will perform well.
"Liquidity is paramount to the industry and until the IPO market opens up again, it will be difficult to see positive short returns based on valuation trends," says Jesse Reyes, vice president of Venture Economics.
VENTURE ECONOMICS' U.S. PRIVATE EQUITY PERFORMANCE INDEX investment horizon returns as of June 30, 2001 (*) Fund type 3 months 6 months 1 year 3 year 5 year Early/seed -3.3% -14.3 -20.6 81.4 55.1 Balanced -2.6 -13.6 -16.1 46.3 35.5 Later stage -2.7 -11.3 -16.3 28.3 24.6 All venture -2.9 -13.5 -18.2 54.5 40.0 All buyouts 2.2 -1.7 -7.2 6.1 11.9 Mezzanine 0.0 2.6 20.8 11.0 11.3 All private equity 0.4 -6.0 -11.3 20.1 21.7% (*)Data is calculated quarterly and tracks more than 1,400 U.S. funds and more than 425 European funds. SOURCE: VENTURE ECONOMICS AND NATIONAL VENTURE CAPITAL ASSOCIATION INDUSTRY (*) RETURNS ON VENTURE CAPITAL FUNDS as of June 30, 2001 Industry 3 months 1 year 3 year 5 year Communications -7.0% -38.3 69.7 43.4 Computer related -0.6 -12.1 7.3 0.6 Internet specific -8.2 -27.7 35.7 33.8 Biotech/pharmaceuticals 3.3 12.4 60.6 42.5 Medical/health 3.7 -6.3 12.9 12.6% (*)based on investment concentration SOURCE: VENTURE ECONOMICS AND NATIONAL VENTURE CAPITAL ASSOCIATION MONEY FLOW SLOWS DOWN VC distribution of cash and stock, in billions of $ 1999 2000 2001 Q1 $1.88 18.72 3.40 Q2 2.70 10.88 $2.10 Q3 3.74 13.30 Q4 10.65 6.84 SOURCE: VENTURE ECONOMICS AND NATIONAL VENTURE CAPITAL ASSOCIATION Note: Table made from bar graph
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