Business Week e.biz -- Net Worth
Everybody into the Venture Capital Pool
Cash is coming from everywhere--thanks to amazing returns
Sure, Martha Stewart is the person to go to for the perfect pistachio shortbread recipe. Now, she's a resource for something else: venture capital. In April, the fashion doyenne, along with venture firm Sudbury Group and other investors, agreed to plunk down $37.5 million to remake the Fragrance Counter Web site into a portal for health and beauty supplies. Stewart will sit on the board of what's now called ibeauty.com. "The goal is to make it the Amazon.com of the prestige cosmetics, fragrance, and skin-care category," says Dr. Samuel Waksal, the head of the Sudbury Group, who organized the investment group.
With the Internet booming, a flood of new investors are rushing into the venture-capital game. They're being lured by quick riches, the chance of a strategic edge for their companies, or just a piece of the Internet action. There are sports stars like former San Francisco 49er safety Ronnie Lott and Detroit Pistons guard Joe Dumars. There's Hollywood director and DreamWorks SKG co-founder Steven Spielberg and LVMH Moet Hennessy Louis Vuitton Chairman and Chief Executive Bernard Arnault. Tech consulting firms like KPMG Peat Marwick and Andersen Consulting talked themselves around possible conflicts of interest so they could turn their inside knowledge into investments. "Everybody wants a play in the venture business," says Geoffrey Y. Yang, a partner at Menlo Park (Calif.)-based venture firm Institutional Venture Partners.
A key draw is a potential return just this side of winning the lottery. Benchmark Capital's original investment of $6.5 million into online auction company eBay Inc., for example, has increased more than five hundredfold, to $3.4 billion. Yang says IVP's funds have been averaging returns of 75% to 90% in recent years. Even the new investors are striking it rich. Renowned architect Charles Gwathmey poured $100,000 into Global Crossing Ltd., the telecom upstart laying cables under the world's oceans, for a stake now worth more than $10 million. Spielberg put what sources close to the director say was $5.5 million into the online city guide CitySearch. That's worth almost $18 million in what's now Ticketmaster Online-CitySearch.
Such stories are attracting oodles of cash. Venture-capital firms raised $12.5 billion in 1998, more than double the $6.2 billion of 1995, according to VentureOne Corp. Easily the largest slice of the money raised last year is the $7.8 billion targeted for information-technology investments. And VentureOne's numbers don't track another growing pool of capital--money available from "angels," or individual investors willing to finance promising startups. "There is dramatically more venture-capital money coming into the business than ever before," says James W. Breyer, managing partner of Accel Partners, a Palo Alto (Calif.) venture-capital firm.
Don't expect to see a slowdown, even though there has been a slight cooling off in technology initial public offerings. The first-day increase in the price of tech IPOs dropped to an average of 53% in May and June from 110% in the first four months of the year, according to Securities Data Co. But few experts think that's enough to stop the venture-capital newbies.
Consider Ronnie Lott, arguably the hardest-hitting safety ever to play football. He and 49er teammate Harris Barton are raising $30 million, largely from other professional athletes. Rather than invest the money themselves, the pair will turn the dough over to top-tier VC firms, including Accel and the Mayfield Fund. While Lott would not comment because the fund is on the verge of closing a round of investment, in the past he has said that he wants to help athletes avoid making bad deals.
Another venture newcomer, Arnault, has a lot more driving him than making a quick buck. After seeing many U.S. retailers get caught flat-footed by Amazon.com Inc. and other Net upstarts, Arnault wants to have a stake in Internet commerce and use the lessons from the cutting edge to protect his luxury goods business. "This is a fundamental change," he says. "Every area of commerce will be affected by E-retail."
Arnault has become one of the most aggressive European investors in E-business, putting about $300 million into 25 Net companies in the past year. He has taken stakes in free Net access provider LibertySurf, Web bank E*Loan, and European auction sites icollector.com and Britain's QXL. He's far from done: On June 30, he unveiled a $516 million investment fund called Europ@Web to back European Net companies.STRONG BONDS. Even high-tech consulting firms are getting into the act. KPMG Peat Marwick started putting cash into upstart companies for the first time this year and has so far invested an average of $1 million in six companies, including software developer Active Software Inc. and Net-solutions provider Silknet. Since the firm's consulting practice is constantly looking for the best technology for its clients, its partners figured they had a better-than-average perspective on which companies were going to be successful. "It helps forge a strong relationship" with companies whose products KPMG is selling, says Rod McGeary, vice-chairman of the firm's consulting practice. Andersen Consulting makes similar investments to strengthen relationships with hot startups and to help good technology come to market faster.
Of course, there's a potential conflict of interest. As consultants, KPMG and Andersen are supposed to pick out the best technology for their clients. In many cases, KPMG and Andersen will sell technology to their customers that comes from companies in which the consulting firms have a financial stake. KPMG says there's nothing to worry about: "We're picking these companies because they're best of breed," says McGeary.
Andersen's response is a bit different. The firm says its partners can pick whatever technology they want for their clients--even if an Andersen-backed firm sells a similar product. "Our commitment to our clients is that we will give them the best possible solution," says John Kunzweiler, an Andersen Consulting partner.
So what effect is the influx of new financiers having on the venture-capital business? There's no question that more technology investments are getting done, faster than ever before. VentureOne says that there were 291 venture-capital deals in information technology in the first quarter vs. 238 in the same period in 1998. That money has supercharged the buildup of Internet players. "There's a very significant land grab," says Accel's Breyer.
Still, all the frenzy around venture capital is making some industry veterans a bit nervous. They worry that the arrival of fashion designers, sports stars, and Hollywood directors could signal trouble ahead. "When there is this much interest, I'm willing to bet we're near a market top," says Breyer.
Some are more blunt: "There's more money chasing fewer deals than I've seen in the last 10 or 15 years," says Terrence A. Elkes, the former chairman of Viacoms Inc. who now does venture investing through his firm Apollo Management LP. Ronnie and Harris, are you sure this is the time to hit your buddies up for money?By Peter ElstromReturn to top