Backing for fledgling firms is drying up


February 03, 1992|By Sean Silverthorne | Sean Silverthorne,Peninsula Times Tribune

Like parched Californians praying for rain, high-tech entrepreneurs need a drenching of venture capital, the great irrigator of American technological competitiveness.

Investors once eager to prime the venture capital pump in exchange for whopping returns have slowly, but surely, put their checkbooks away. The result: Venture backing for new firms is near an all-time low.

"The third quarter was the worst we've seen in our seven years of following the industry," said Richard Shaffer, principal of the New York-based Technologic Partners consulting firm. "I think we're in for one or two more years of contraction."

Start-ups are especially hard hit. Normally, about a quarter of venture arrangements involve seed money or first-round financing of new companies, said Mr. Shaffer. But in the third quarter, only 13 percent of the deals involved early-stage businesses.

That's bad news for a country that relies greatly on young companies to advance the state of the art in computers, biotechnology and medical research.

"Our life blood is being able to keep pace with technology, and this makes it that much more difficult in an already competitive environment," said Ed Hatcher, a senior vice president for the American Electronics Association trade group.

"I don't think there is any question it's going to have a very serious, ominous effect for a lot of companies," he said.

In the third quarter, just $207 million was invested in computer-related companies, off 20 percent from the $258 million invested in the same period a year earlier, according to Mr. Shaffer.

And investing over the first nine months of the year totaled $727 million, down 15 percent from 1990.

The venture capital crisis actually goes back to 1987.

That's when the major bankrollers of venture enterprises, such as pension and insurance funds, began to redirect their money to safer investments. Although the best venture funds have been able to create 30 percent or better returns for their backers, most have provided mediocre or no profit, according to analysts.

With less money to invest, some venture financiers have fled the business. Those remaining are more critical of potential investments. Great people with great ideas are still finding financial support, but venture capitalists are becoming more risk-averse.

Consider David Lam, who in 1980 turned $3.5 million worth of American venture capital into Lam Research Corp., a profitable semiconductor equipment manufacturer that last year reported $144.1 million in fiscal 1990.

Despite his good track record, he has not been able to attract U.S. venture backing for his new start-up, Expert Edge Corp. in Menlo Park, Calif., which is developing artificial intelligence software for improving manufacturing operations.

So he took his ideas to Asian investors, who quickly anted up. "I had no choice but to go overseas, and they welcomed us with open arms," he said.

But two factors suggest the U.S. venture capital business may soon be, if you will, back in business.

For one, the industry's most successful players are having little difficulty raising funds. Oak Investment Partners, Mohr Davidow Ventures and Sevin Rosen Funds all closed new funds recently.

"The funds that have performed and done well for their investors are not having problems raising money," said Jon Bayless, a general partner in the new $50 million Sevin Rosen Fund, which is looking for opportunities in the areas of wireless communications, portable computing and specialized semiconductors.

The second factor is the hot market for initial public offerings, the traditional pay day for venture investors. Steep gains from recent IPOs such as Artisoft Inc. and Quarterdeck Office Systems Inc. are sure to whet the venture appetite again.

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