The state of venture capital and what it means for you.

• Author: Robbins, Larry E.
• Position: The 2002 Law Journal

People who participate actively in the North Carolina venture community refer to 2001 and, for that matter, the first half of 2002 as a "venture recession." The last venture recession occurred in 1990-92 and was set up by the failure of the previously favored biotech industry to quickly follow tip on early successes such as Amgen's Epogen and Genentech's TPA. Prior to the 1980s, the venture-capital industry was small enough that it would have occurred to no one to wonder whether it was in a recession. In any event, there was literally no venturecapital industry in North Carolina before the mid-1980s. Thus, we have limited history to draw upon in analyzing the implications of this current venture recession. Nevertheless, the purposes of this article are to identify what are the root causes of the current venture recession and to project what steps entrepreneurs can take to obtain funding in this changed environment.

On the surface, the primary cause of the current venture recession is the bursting of the dot-com "bubble" of the late 1990s. It is well understood that the money invested in dot-com era startups, and the associated valuations of such companies, were excessive. Yet the dot-com era came to a screeching halt in April 2000, and venture investment is still at a crawl. Intrepid entrepreneurs still are forming technology-based startups that are seeking investors, so the lack of venture investment cannot be attributed entirely to lack of opportunities. Likewise, the nation's premier venture-capital funds have record amounts of capital available to them, mostly raised before the venture recession and not yet invested. So why are venture capitalists not investing at the pace of prior years?

Following the dot-com bubble bath, venture capitalists out of necessity tended to focus on providing management and continued operating capital to existing portfolio companies. Often, continued infusions of capital during this turbulent time have involved more complicated deal terms, such as liquidation preferences that are multiples of the amounts invested. As a result of the focus on existing portfolio companies, few new investments occurred in companies not already in a venture fund's portfolio. Since then, many of the portfolio companies have been sold or shut down, yet the pace of investment has not, increased significantly. The reasons are grounded in a return to fundamental investment analysis on the part, of the venture community.

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