The venture-capital industry has reached a dubious milestone: For the first time, returns for a 12-month period were negative. For the year ended Mar. 31, 2001, the industry's portfolios recorded a loss of 6.7%, according to newly released figures from Venture Economics and the National Venture Capital Assn.
The pall in the technology arena, where valuations have plummeted, led to an 8.9% loss for the first quarter, the fifth consecutive quarter in the red. In times like these, it pays to think long-term, according to Jesse Reyes, vice-president of Venture Economics. "While the markets continue to focus on the short-term changes in the technology areas VCs like to invest in, institutional investors who have been in these investments for a long time know that long-term investment performance is what you are looking for," he says in the report.
Funds formed at the height of the Internet boom, in 1998 and 1999, are bearing the brunt of the market volatility, recording both higher annualized returns and, now, steeper quarterly losses than older funds. In the current valuation climate, the young funds face steep odds of catching up to the overall performance of their more mature counterparts, the report notes. Funds started in 1990 have returned, on average, 260% of invested capital, compared with 55% for funds started in 1998.
Mark Heesen, president of the National Venture Capital Assn., sees a bright spot: "With valuations at their lowest levels in recent quarters, the current environment has opened up some excellent investment opportunities." These days, such opportunities presumably are limited to VCs focused on the long-term.
By Theresa Forsman in New York