Shaking The Money Tree III, Q1/2000:
The Wrath Of Nasdaq
(Reston, VA -- June 4, 2000) According to PriceWaterhouseCoopersí
(PwC) latest MoneyTreeô
survey, in the first quarter of 2000, venture capital investments once
again broke all records, both in Greater Washington and around the
country. But by quarterís end came a plunging stock market, with the
Nasdaq and its Internet stocks hit especially hard.
"Did the bubble burst, and do these market changes signal that
the venture capital well is now beginning to run dry for our
region?" asks Erik Ayres, Business Development Manager for PwCís
DC Metro TICE Practice.
Ayres was moderator of Shaking The MoneyTree 3, a quarterly
event co-hosted by PwC and the Morino Instituteís Netpreneur.org,
in which a panel of VCs provide commentary and analysis of the
MoneyTree numbers, with special focus on what they mean for Greater
Washington netpreneurs. At this quarterís event, panelists Patty
Abramson of Women's
Growth Capital Fund, Patrick Kerins of Grotech
Capital Group and Steve Walker of Walker
Investment Funds discussed such topics as
the regionís place, the value of venture fairs, and the growing role
of corporate venture funds. But Ayresí question kept surfacing: What
effect will the marketís gyrations have on netpreneurs seeking
According to Walker, "Yes, something happened in March and
April that brought the market back to earth, but this, in itself,
isn't the end of the world. If you have been in this game for any
length of time, you know that this happens every so often. There was a
reset back in the fall of 1998 that hurt a bunch of folks. There was a
reset in July of 1996 that I remember incredibly well because we were
preparing to do an IPO in July of 1996."
Before getting into the venture game, Walker founded Trusted
Information Systems (TIS), an early success in the Internet security
market. He told a tale of personal confrontation with a gyrating stock
market. "We had started in May, and we were on a crash program to
make this happen. On July 5th, the market went gazunk. We had meetings
and everybody said, ĎThat's okay, it will be better by Tuesday.í
On Monday it went gazunk. On Tuesday it went gazunk. There were four
or five gazunks."
Walkerís company postponed their IPO for two months in 1996,
using the time to improve their fundamentals. Trusted went public in
September, and was eventually acquired by Network
Associates in a deal valued at $350 million.
Many companies today are waiting too, pulling or postponing their
planned IPOs in response to the marketís gyrations, including three
in greater Washington. Indeed, the consensus was that the greatest
effects will be felt by the later stage companies which are preparing
to go public, rather than on startups.
"The IPO market is definitely trickling," noted Kris
Muller, a partner with PwC's Global Technology Industry Group in the
DC Metroplex area, "but we are seeing IPOs in the holding
pattern, right now. People in this region haven't surrendered to the
market. They are still not optimistic, but holding their own that the
market will, in fact, turn around. The substance of the IPOs out there
and waiting are the ones you would expectĺ
the infrastructure, software and technology companies that are helping
to build the Internet, and the Internet isn't going away."
Abramson likens the climate to that of the real estate boom in the
1980s. With 20/20 hindsight, people asked later, "What were the
banks doing lending all this money to these companies without any
collateral?" She predicts similar effects for VCs today,
"One thing that's happening is that this is forcing us to do the
job we should have been doing all along, because part of our role,
other than making money for our investors, was to get these companies
out there, healthy and ready when they went public or merged. In some
cases, we were greedily pushing them along, and they weren't really
ready to go out."
While later stage, IPO-bound companies may see more dramatic
effects as a result of market conditions, donít expect it to effect
the flow of startup money. According to Grotechís Kerins, "The
best measure of demand for venture capital deals is the total amount
of venture capital funds under management, and that number has grown
in this quarter. There is now more money on the sidelines committed by
institutional investors to venture capital firms looking for venture
now than there was a quarter ago."
The panelists do expect two things to happen relative to startups,
in fact they have already begun to happenĺ
lower valuations and deals where there is a greater sense of financial
substance to the company. According to Kerins, "My sense is that
the deal flow and the willingness of firms to close on deals in this
region has not changed much. I think we are in a reasonably typical
pattern where, when valuations change, there is a little bit of
circling going on. An entrepreneur may have been fairly advised three
months ago that his or her company was worth X, now is hearing from
venture capitalists that it's .6X or .7X."
Ironically, this trend may play right into the Greater Washington
regionís strengths. For one thing, the regionís deal flow is
heavily weighted toward startupsĺ
58% according to the MoneyTree survey. As Abramson pointed out,
"As the valuations have gotten higher, a lot of the smaller funds
are finding that they need to invest earlier and earlier to get a
piece of the pie."
Perhaps more importantly, the areas in which this region is
particularly strong, such as B2B applications and Internet
infrastructure, do not require huge sums of investment capital the way
the deep technology and hardware companies of Silicon Valley or Boston
do. Says Kerins, "You see companies that could create potentially
multi-billion dollar companies on $3-$4 million with a dozen people.
Thatís become a very attractive place for venture capitalists to
go." Where DC does have large-investment startups is in telecom
services. While VCs may be becoming a bit more conservative when it
comes to those companies that need $100-$400 million, they also see a
ravenous global market for bandwidth which keeps them interested.
Among US regions, Greater DC saw the highest percentage growth,
both for dollars and number of deals over last quarter. Accelerating
that growth, according to the panelists, has been the increasing
number of local serial netpreneurs, growth in the local angel
community, the increasing sophistication of local service companies
and the fact that cashed-out technology veterans are staying here in
the region. And itís all happening, according to Walker, at a time
when we havenít even begun to tap some of the regionís greatest
strengths. He urged netpreneurs to build bonds with the many local
universities, federal laboratories and trade associations.
The panelists also discussed the pros and cons of other resources
available to local netpreneurs, including venture fairs, incubators
and the heightened activity by corporate venture funds. Use them, but
be careful, especially of the corporate funds. They can be good or
bad, depending upon your immediate and long-term goals. All money
comes at a price, and sometimes that price can be too high.
All in all, it seems Nasdaqís bark may end up being worse than
its bite, at least for startups and at least for right now. The "gazunk"
of Spring 2000 may have been bigger than some of those others, but,
said Walker, "at the time they happened, it wasn't clear whether
the bubble had burst then. The fact is, these things happen in
And speaking of cycles, on June 1, the day after the event, the
Nasdaq was up 181.59 points. On June 2, it was up 230.88 points.
Whatís the opposite of gazunk?
Copyright © 1996-2003 Morino Institute. All rights reserved.