Venture capitalist's sprint has slowed to a jog
If Peter Morris has learned anything from the Internet bust, it's this: Know how your client plans to make money.
"The business model is the biggest change from last year," said the soft-spoken Morris, a 44-year-old venture capitalist with New Enterprise Associates. "We're looking for business models that are proven and not speculative, and that was what was lacking in the dot-com era."
Truer words have never been spoken, but that wasn't the case a year ago.
At that time, venture capitalists- the key players in setting the stage for financing as a company evolves from start-up to a stock offering or an acquisition- were used to taking a business public in a few years and cashing in almost immediately. Now, Morris says, that process may take as long as seven years.
Venture capital firms receive investments from outside sources, such as wealthy individuals or "institutional investors" such as corporations, organizations and managed pension funds. This money is then placed into venture funds, which make investments in privately held companies with the hope that they will go public or be acquired- and thereby provide a profit.
But this system works only if people are willing to invest their money in the first place.
"I now spend about 15 percent of my time looking at new potential investments, as opposed to 25 percent a year ago, and I might have one board meeting a day instead of two or three," Morris said, describing how his workday has changed in the last year.
Each partner handles about one or two new deals a year, compared with two or three deals per partner during the online Gold Rush. And the industry now considers 30 percent a normal return, rather than the 100 percent-plus gains that some funds were known to post. (New Enterprise, which has about $3 billion in assets, expects long-term returns of around 35 percent.)
Though venture capitalists invested a whopping $68.8 billion into companies last year and far exceeded the $38.2 billion of 1999, nearly a third of that money flowed in the first quarter, just before the market began its precipitous fall, according to finance research firm VentureOne. Venture capitalists, as a result, closed their wallets over the next three quarters, a trend not seen for more than five years. And once-astronomic company valuations rose just 17 percent in 2000.
As with all memorable events, Morris vividly remembers what he was doing on the day the Internet bubble burst.
Morris was listening to a presentation by the CEO of a communications company, who was seeking an investment.
"I was seated at my desk and he sat across from me. From time to time, I would glance at my computer to see how the companies in our portfolio were doing," Morris recalled. "Suddenly, the conversation shifted from his business to, 'Oh my God, look at the markets.' Initially, he was offended until he realised the severity of the drop and wondered what impact it would have on his funding activity. I told him it was too early to tell. The difference between then and now is that we now know."
On March 20, the Nasdaq closed at 4,610, more than a 188-point drop, or roughly 4 percent. Within two weeks, it plummeted nearly 400 points more over three days.
Despite the free fall, some things haven't changed. Morris, who focuses on communications companies and is a director on 15 boards, bases his investment decisions on potential markets of at least $1 billion, a solid product that fits the opportunity, a management team of experienced entrepreneurs, and a proven business model.
Morris still wades through three or four business plans a day and has yet to invest in a company that wasn't referred to him by someone he knew and trusted. He does, however, keep much closer tabs on the companies he works with.
Morris, who brought in such successes as Juniper Networks, an Internet routing equipment maker that posted nearly a 200 percent gain on its market debut in 1999, says he visits at least two or three of his portfolio's companies each day. But he says it's the part of the job he thrives on.
"As a venture capitalist, I'm a financial adviser, a backboard for strategic ideas, an executive recruiter and business development resource," Morris said. "But lately, I'm training and mentoring a lot more management teams than I did a couple of years ago, because you can't get lucky anymore."
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