Cooling off

VC market not red-hot, but money still available

The blow-and-go days of venture capital investment turning Internet-related start-ups into gold mines might be over, but opportunities still exist for those with the right business plan - particularly for those addressing networking needs, say industry observers.

A recently released study by PricewaterhouseCoopers Money Tree shows that venture capital spending has waned during the third quarter of 2000.

Miles Spencer, who hosts PBS' "MoneyHunt," said many of the applicants trying to get on his show still have an Internet component but no longer make it the focal point of the business.

"It's just that they don't advertise it," Spencer said. During the show, wanna-be entrepreneurs have their business plans reviewed by Spencer, co-host Cliff Ennico and a group of industry experts. "When we were auditioning for our show, businesses just don't make it a point anymore."

Spencer and other venture capitalists say that is largely a product of the marketplace - the drop mirrors the fall on Wall Street of technology-laden companies. "The largely free-wheeling times of Internet-driven companies has cooled," Spencer said. "It could be the beginning of the end. But the book has a lot of chapters."

When the market corrected itself, so did some of the industry, said Jennifer Gill Roberts, a partner with Sevin Rosen Funds. In addition, she says many venture capital funds are at capacity right now.

"It was an unprecedented pace," Gill Roberts says. "Many of us were on 15 or 20 boards. Some [venture capital companies] declared an unofficial moratorium. A lot of venture capitalists had to refocus."

The Money Tree study shows that Internet-related venture capital slowed to $10 billion in the third quarter from about $11.9 billion during the second quarter. Internet- and technology-related investment - about $16.9 billion of it - dominated the overall $17.6 billion total for the third quarter.

Steve Diamond, a general partner for The Sprout Group - the venture capital arm of Donaldson, Lufkin & Jenrette, which has been acquired recently by Credit Suisse First Boston - agreed that the slowdown is a reflection of the public sector.

"[Public sector investors] got ahead of themselves," Diamond said. "The public markets in late 1999 and earlier this year were used as venture capital. Then, companies would go out for another round of funding before going public with an IPO. The public markets simply are not willing to take that risk anymore."

The Sprout Group certainly hasn't slowed down any after recently announcing that the firm has closed on $1.6 billion in new funding, Diamond said.

Tim Donovan, director of corporate communications for Zhone Technologies, hasn't felt the slowdown. Of course, Zhone recently landed a $500 million venture capital investment. Zhone pursued a multipronged funding plan by using money from VCs, leveraged-buyout firms and others, Donovan said.

"But what we have is a solid management team, and we're in the last segment of the market that's still growing," said Donovan, referring to Zhone's work on a line of telecom infrastructure products for the local access network. "The money will flow toward the ideas that show true innovation."

Donovan believes there is still venture money out there for the right ideas. "Look, the telecommunications market is a $600 billion industry," he said. "We've gone from the eight members of the management team to more than 600 employees in just 12 months. We know how to execute a plan once we get the venture capital and then how to get it to market first and produce it."

There is still plenty of opportunity out there, Gill Roberts said. Sevin Rosen hasn't slowed much. "There certainly are some new ideas out there," she said. "The focus - and our focus - is on communications components. We focus on the optical side."

But there definitely will be an emphasis on valuation. Instead of the huge amounts of venture capital being invested, smaller sums being offered, Gill Roberts said. "You might see $25 million being invested instead of $50 [million]," she said."