In 2000, with IPOs popping and the likes of Cisco buying every startup from Cambridge to Cupertino, venture capitalists were awash in cash.
Foundations, pension funds and university endowments gleefully upped allotments, believing astronomical returns would never end. In addition, newly minted
millionaires and corporations entered the game in unprecedented numbers.
The confluence of wealth and unrealistic expectations produced a dizzying tally -- $73.9 billion in venture capital.
But by spring 2001, the new economy's foundation was showing cracks. Dot-coms died, investors took their lumps, and VCs prepared for smaller funds. Now, a
new study shows how steep the dropoff was.
VCs raised $35.7 billion in new funds last year, 52 percent less than the year before, according to The Private Equity
Analyst, a Wellesley, Mass., industry newsletter.
"Many (VCs) set high fundraising goals that proved unrealistic," said David Toll, the publication's editor. "Institutional (investors) were a great deal more
cautious last year, and hesitated to re-up with firms they historically supported."
That left many established (VCs) scrambling. Meanwhile, new firms fell victim to terrible timing; the failure of their first firms ensuring that there would not be a
second. Corporations, which established their own VC arms in the late 1990s, also began shutting down those operations, conserving cash during difficult times and
focusing on their core business.
Several VC raised giant funds 2001, including Summit Partners and Charles River Ventures, but overall the industry is investing faster than it is fund-raising. When
VCs return to their backers they will not see the enthusiasm of 2000.
Funds are already falling, with the number of billion-dollar-plus funds plummeting from 19 in 2000 to six in 2001.
While the stats are sobering, VCs continued to have success in traditionally strong states. California, home to a large concentration of VCs, led the nation in
fundraising at $12.5 billion, followed by Massachusetts at $9.1 billion and Connecticut at $3.5 billion raised.
The complete top 10 follows:
1) California - $12.5 billion
2) Massachusetts - $9.1 billion
3) Connecticut - $3.5 billion
4) New York - $2.3 billion
5) Texas - $2.2 billion
6) Illinois - $1.4 billion
7) Ohio - $1.2 billion
8) Washington - $910 million
9) Maryland - $760 million
10) New Jersey - $661 million
A lone bright spot in 2001 was the health care funds, although like IT funds before it, the sector could be "overheated," Toll said.
So what about 2002? It will likely be another lean year. Firms raising money to for bio-tech or defense and aerospace ventures stand the best chance to meet their goals, Toll said.
Like all businesses, venture capital is cyclical, firms with a solid track record, longevity and strong management will survive, Toll said.
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