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Top venture firms of 1998
By Cheryl J. Myers
Red Herring magazine supplement
Going Public 1999
The venture capital business is risky, but it's easy to forget
that fact when Internet companies with virtually no earnings are raising record
amounts of cash through initial public offerings, and when private technology
companies are acquired for similarly impressive amounts. While IPOs saw some
rocky times last year, many VC firms still earned impressive returns through
their portfolio companies' IPOs.
Departing from the method used in last year's issue, this time
Going Public ranks 1998's top VC firms by the percentage gain of the stock of
its technology portfolio IPOs from the time of the IPO until year-end. We chose
this measure rather than market capitalization gain so as not to exclude smaller
issues with remarkable percentage gains. One drawback of this method, under
current market conditions, is that the stock of companies that went public later
in the year had less time to appreciate; the method also disregards mergers and
acquisitions -- often a lucrative exit strategy for VCs but one that cannot be
compared using the same criteria. Our latest rankings, which were compiled by
Venture Economics, are based solely on venture-backed IPOs and exclude companies
that conduct most of their business outside the United States, as we have done
in the past.
Going Public's top-performing VC firms are Benchmark Capital
and Maveron -- both invested in eBay (Nasdaq: EBAY), which appreciated by more
than 1,300 percent. Nine of the top 25 firms invested in Exodus Communications
(Nasdaq: EXDS) (including 7 companies whose sole portfolio IPO was Exodus),
which appreciated by 287.1 percent.
One of the more interesting additions to this year's list is
Intel, whose Corporate Business Development Group tied (with W.S. Investments)
for No. 3, with a return of 633.3 percent from its investment in Inktomi
(Nasdaq: INKT). The group's emphasis is on expanding the market for Intel
products, including PCs and workstations, but its 1998 IPO proved that it has
the financial and strategic shrewdness to compete with the nation's
top-performing VC firms. The investments of Microsoft and Sumitomo had similar
successes in 1998, with IPOs that placed them at No. 5 and No. 19, respectively.
Although our top 25 firms earned impressive returns from IPOs,
the total capital raised in these offerings by venture-backed technology
companies increased only 5 percent from 1997, according to the
investment-research firm VentureOne. A possible reason is that the number of
venture-backed tech IPOs decreased for the second year in a row. The drop hasn't
deterred VC firms from investing in new companies, though. In fact, according to
PricewaterhouseCoopers' MoneyTree survey, 1998 was a record year for technology
venture financing: the year's investments totaled $10.8 billion, up 30 percent
from 1997 and up 96 percent from 1996.
With new investments in tech companies at a record high and
with a less predictable market for IPOs, many of these companies (with the
blessing of the VC firms backing them) may seek to be acquired rather than go
public. But after the headiness of 1998 -- when, as VentureOne observed,
VC-backed companies entering the public markets earned record valuations -- many
companies may be unable to resist the temptation of an IPO.
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