The venture capital community, it seems, is as eager as the technology industry to uncover signs of an upturn – no matter how tenuous.
"The free fall is over," proclaimed Tracy Lefteroff, partner at the venture capital practice of PricewaterhouseCoopers in February 2002. The evidence for this bullish remark was a tiny sequential increase in funds invested in start-ups: to €8.2 billion in the fourth quarter of 2001 from €8.1 billion in the third.
There seems little to celebrate, however, when this is compared to the €24 billion that VCs invested in start-ups in the same period in 2000.
Limited partners will certainly find little comfort in Lefteroff's analysis. Declining valuations and sluggish initial public offering (IPO) and mergers and acquisitions (M&A) markets have pushed VC returns down to -32.4% for the year to September 2001, the worst performance since records began way back in 1969.
The absence of an exit market, according to Jesse Reyes, vice president of research group Venture Economics, has also dramatically slowed the flow of money back to investors – just €1.3 billion of cash and stock in the third quarter of 2001, compared to a record €21.8 billion in the first quarter of 2000.
Understandably aggrieved by this situation, investors are withholding further funds from venture capitalists. A mere €5.3 billion went into VC coffers in the fourth quarter of 2001, down from €26.9 billion in the same period of 2000.
Still, VCs seem relatively unperturbed. After all, they still have €115 billion in uninvested cash, and the fat management fees that accompany this, to fall back on.