VC Funds Decline for Second Consecutive Quarter

July 19, 2001 (PLANSPONSOR.com) - Plan sponsors invested in venture capital are faced for the first time since 1974 with losses posted by venture capital firms for two consecutive quarters.

Venture capital funds fell by 8.9% on average over the first quarter of the year, following a 6.3% decline the previous quarter, an analysis of 1,200 funds shows.

This marks the first time since1974 that venture capital funds have posted losses for consecutive quarters, according to Thomson Financial Venture Economics, which compiles the data.

This follows boom years, during which pension funds poured increasingly higher amounts into private equity funds. Over the past two years, US venture funds poured $103 billion into 5,380 firms. The VC funds booked average returns of 165.3% and 37.5%, respectively, in 1999 and 2000.

Paradise Lost

The current losses result from an increasing number of write-downs – losses taken when their investments go out of business and are acquired for pennies on the dollar or face a round of financing at a lower valuation than in the previous round.

In addition, since the venture capital funds typically make the most of their money from floating the companies in which they invest, a market that remains in the doldrums is not good for business.

Funds launched in 1996 that had invested amid hot competition for deals and sky-high valuations, felt average losses of 19% in the first quarter of the year.

However, early venture capital fund investors are still ahead – the triple digit returns of the past translate to an average annualized gain of 94% a year since inception, according to Venture Economics.

– Camilla Klein                editors@plansponsor.com

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