TECH SAVVY MANAGEMENT UPDATEThe Law of Supply & Demand?
The question today is where and when will the law of supply and demand rule in high tech venture investments. Let's look at the situation:
1. Although the NASDAQ is back up to where it was at the beginning of the year, it is still down about 20% from its all-time high several months ago.For details click here.
2. As a result of the market drop, investor psychology has changed dramatically and the IPO market is very tight. The number of IPO's has dropped dramatically. There have been a lot of delays and cancellations of planned high tech IPO's. Valuations of IPO's that have hit the market are down. After months of IPO stock prices going up 2-3x and more on the first day of trading, some are now actually closing at a lower price than the offering price. A recent example is the DivineInterventures IPO.
3. Cash has become much tighter in dot coms as their planned IPO's are delayed or scrapped. This has changed the ballgame in many dot coms as they are now struggling to survive. For more details click here
4. As cash has become harder to acquire from VC's some dot coms are becoming 'deadbeat dot coms' when they shut down. This is making dot com suppliers take a harder look at who gets credit from them. For more information see the July 24 issue of fortune.com.
5. The public holdings of VC funds have really tumbled in recent months. For example, the value of Draper Fisher Jurvetson's stock holdings in Fogdog.com are down 88% and in eFax.com down 85%.
6. The value of the funds of many VC's are down substantially. For example, CMGI Fund is down 45% and CMGIAtVentures is down 48%.
7. The VC's are saddled with startups that are burning money but which they can't take public. The VC's are now being faced with the tough decision of throwing more money into a sputtering startup or shutting off its capital.
8. Predictions are now being made about a shakeout in the VC industry.There is a good article on the above four points in The Industry Standard of July 24, 2000.
9. In spite of all the above there was more money raised by VC's in the second quarter of 2000 than any prior quarter. VC firm Menlo Park Ventures just closed its ninth fund, Menlo Ventures IX, with $1.5 billion in committed funding. BMO Nesbitt Burns, the investment banking division of the Bank of Montreal, has launched a $450 million venture capital fund called the Halyard Capital Fund. BMO Nesbitt provided all the funding.
10. Softbank Venture Capital, the affiliate of the huge Japanese bank founded by multibillionaire Masayoshi Son, is on a binge. This is happening in spite of the bank's share price plummeting 80% this year and Son's fortune dropping to $22 billion from $69 million, when he was the second richest man in the world behind Bill Gates. Last month they closed a $1.5 billion fund and invested over $200 million in startups, 40% more than the previous monthly record. The CEO of Softbank Venture Capital expects to invest $12 billion over the next five years. For more information, see forbes.com.
Links to the web sites of over 50 VC firms can be found on my firm's web site by clicking here.
Here are some thoughts to ponder in this situation:
1. Since VC's are raising a lot more more money, then obviously the supply of venture money is increasing.
2. If VC's are becoming more stringent in funding companies with a real profit model, is the number of these companies and the true valuation of these companies increasing fast enough to provide the demand to soak up these new funds?
3. If the valuation of current VC funds is down and the market valuation of stocks in their portfolio is down, what is making investors believe that things will be different in the new funds that are being started and closed now?
4. Where and when will the investors in these new funds get the 30 - 40% annual returns to which they have become accustomed?
5. Is the key way to manage the rate of return on the VC funds invested simply reducing the valuation and increasing their ownership share in startups in the early stage and subsequent funding rounds?
6. What is going to happen to valuations if the prophesied shakeout in VC firms actually occurs?
7. Will the estimates of 75% - 90% of dot coms being out of business by the end of 2001 become reality?
I am by nature an optimist. And I believe very strongly that technology has been the foundation of our present prosperity and that it will be at the root of our future prosperity. Yet the above questions are troubling. I don't profess to have the answers. No one does. But they do bear thought as we look out over the next couple years. And we all need to remember that at the end of the day the law of supply and demand will rule.
Cordially,
Harry
Harry L. Nolan, Jr., President
Certified Management Consultant
Management Advisory Services, Inc.
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Business - Law of Supply and Demand
