Venture Capitalists Are Hearing Footsteps

By CLAIRE CAIN MILLER

VENTURE capitalists are optimists by nature. They bet on start-ups that are little more than ideas and hope they have found the next Google.

But these days, even some of the sunniest venture investors are having dark moments of the soul.

Mark V. Cannice, director of the entrepreneurship program at the University of San Francisco, who polls Silicon Valley investors, said venture capitalist confidence had plummeted to its lowest point since 2004, when he began the surveys. “Right now, everybody is really worried,” he said.

Venture firms are not at the epicenter of the latest financial turmoil, yet they are increasingly concerned that Wall Street’s virus will continue to spread through Silicon Valley, pushing the industry into a crisis.

Fewer start-ups have gone public in 2008 than in any year since 1977, and companies looking to buy them have grown skittish. So venture firms have to keep putting money into companies they thought they would have cashed out of by now.

Meanwhile, the credit crunch is taking a toll on banks and insurance companies, which make up one-fifth of investors in venture funds.

Some wealthy investors and big companies that previously committed money to venture funds are now unable to supply it — leaving these investors with the option of defaulting and losing what they already had invested, finding a replacement or selling their stake at a discount to what is known as a secondary firm.

David H. de Weese, who leads the global secondary business at Paul Capital Partners in New York, said he had been getting many calls from beleaguered investors. “We’re drinking from a fire hose at the moment,” he said.

Consider FTVentures, a San Francisco firm that invests in technology companies that build services for the financial industry. Its lineup included some unlucky blue-chip investors: Lehman Brothers, Washington Mutual, American International Group, Freddie Mac andFannie Mae, all of which have failed or have been bailed out recently. FTVentures, which closed a $512 million fund in April, said it does not expect any of its investors to default on their commitments.

A few venture capital firms still continue to raise billion-dollar funds and, in turn, invest hundreds of millions in start-up companies. In September, AustinVentures closed a $900 million fund, Sequoia Capital closed two funds worth a total of $1.7 billion, and Battery Ventures raised $250 million to tack on to its eighth fund, for a total of $1 billion.

Continue reading: http://www.nytimes.com/2008/10/07/business/07venture.html?partner=yahoofinance