Venture capital continues to pour in
BY MONUA JANAH, San Jose Mercury News
San Jose Mercury News, 07 November 1999
© Copyright 1999 Mercury Center
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The floodgates of venture capital opened wider still this summer, setting
almost 300 Bay Area companies afloat on a torrent of cash. Venture
capitalists again shattered records by providing $3.32 billion in financing
for Bay Area companies in the third quarter, outstripping by 25 percent the
$2.65 billion they put up in the second period. All told, this pushed the
total of VC funding for the first nine months of this year to $7.7 billion,
nearly equaling the $8 billion for 1997 and 1998 combined.
Venture capitalists rewarded both sizzle and steak in the third quarter,
pumping money into glitzy, heavily marketed Internet retailers as well as
into lower-profile operations selling services for businesses, software and
communications equipment. The number of companies financed also hit a high
of 298, up from the previous quarter's 282. The average amount per deal rose
to $11.15 million from $9.59 million, according to the latest survey of the
Money Tree, a joint report on venture capital by the Mercury News and
PricewaterhouseCoopers LLP. Critics said the almost-unlimited availability
of capital is a sign that venture funds, flush with institutional money, are
chasing too few good ideas. But venture capitalists defended their
investments, pointing to the transformation of global business by the
Internet. ``I think the Internet has created such change that we are seeing
an unprecedented amount of opportunity and therefore an unprecedented number
of compelling new businesses, businesses that are strong enough to command a
significant amount of capital,'' said Andy Rachleff, general partner at
Benchmark Capital in Menlo Park.
The largest deal in the Bay Area was for Webvan Inc. of Foster City, a
much-hyped online grocer, which garnered a staggering $275 million in
funding. That far outstripped the second-largest financing, $70.3 million
for RealNames Corp. of San Carlos, which provides ways to search the Web
using keywords. But a good chunk of money also flowed to the so-called
``business-to-business'' Internet sector, which consists of companies that
provide services, infrastructure or goods for other businesses. For
instance, ChemConnect Inc., which offers an online chemicals and plastics
exchange, received $33.8 million; Moai Technologies, which sells tools for
creating Web auctions, got $15 million; and Electron Economy, which creates
and manages companies' e-commerce operations, was funded with $11 million.
According to the Pricewaterhouse survey, the ``business services'' sector
got a total of $365.8 million in the quarter, and the ``consumer'' sector
reaped $425.4 million. About $132 million flowed into a separate category
called ``distribution/retailing,'' which included companies such as eve.com,
which sells cosmetics over the Web, and BravoGifts.com, an online gifts
operation. Venture capitalists said they don't plan to focus on any one
sector at the expense of the other. ``We continue to take a very keen
interest in both business-to-business and business-to-consumer
opportunities,'' said Brad Garlinghouse, general partner in Menlo Park at
@Ventures, the investment arm of CMGI Inc. of Andover, Mass. ``Basically, we
are looking for opportunities that can revolutionize current inefficiencies
in the marketplace, whether in companies' supply chains or in consumer
buying experiences.''
Communications companies also fared well in the quarter. As Internet use by
individuals businesses accelerates, these companies, which sell the plumbing
for the networks, are prospering. Of this year's initial public offerings,
some of the most successful have been by network-hardware companies such as
Extreme Networks, Juniper Networks and Sycamore Networks, as well as Akamai
Technologies, which speeds the delivery of Internet content. Observers
pointed out that these companies are faring much better in the public
markets than consumer-oriented Internet businesses.
Cobalt Networks of Mountain View, which makes custom Internet servers, got
$36.3 million in venture funding in the second quarter, making it one of the
largest deals in that period. On Friday, Cobalt conducted its initial public
offering, and its shares rose almost sixfold to $128.13 a share. Meanwhile,
Webvan's shares, also offered to the public Friday, rose a relatively modest
66 percent to $24.88 a share. That means Webvan, a company with $395,000 in
sales and $35.1 million in losses for the first six months of 1999, has a
market capitalization of $8.37 billion. In comparison, Kroger Co., the
largest U.S. operator of supermarkets, has a market value of $18.3 billion.
Economists said one result of the increased flow of capital, and the
ballooning size of individual deals, is to intensify pressure on an
entrepreneur to make their company successful more quickly. ``I'm inclined
to think there's more pressure on the entrepreneur,'' said David Henderson,
a research associate at the Hoover Institution, a think tank at Stanford
University. ``If the person getting the capital just doesn't make it happen,
he loses his own investment and his reputation. With a larger amount
invested, there's a bigger splash when he fails.'' Others said the growing
size of the deals is a symptom of the maturing of the technology industry
and its absorption into mainstream American business. ``What's going on here
is a maturation process,'' said Ken Goldstein, an economist at the
Conference Board. ``Ten years ago, any number of these entrepreneurs were
operating out of their garages. But the kinds of businesses that have growth
potential now are too big to be in anybody's garage. To compete with the
businesses that are out there already, you need a far greater amount of
capital.''