Venture capital fund managers have been writing down their investments for the last two years, and still don't know when the bleeding will stop.
The consensus among industry experts is that the venture write-downs will continue until the economy turns around, but there is no agreement on when that will be.
"A year ago, we expected that the write-downs would have ended by now, but the market hasn't recovered yet. As a result, venture capitalists are investing more in their companies, whose valuations have dropped sharply in the past couple of years," said Bradley Atkins, chief executive officer at private equity consultant Franklin Investment Advisors, Conshohocken, Pa.
The venture funds from the vintage years 1998 through 2000 have suffered the most, and several fund managers predict the final returns are likely to be ugly.
Seasoned investors have been taking all this bad news in stride. Several said that at this point, they are just hoping they get some money back from funds begun those years.
The poor performance of venture funds has led some limited partners to cut back on investing, but none seems to be leaving the asset class yet, according to interviews with pension fund officials and consultants who advise them.
"Institutional clients are not leaving the asset class, but they're in no hurry to commit, either," Mr. Giannini said. "They are being more selective, more careful. Some are scaling back their exposure and slowing their pace. They may feel there's no reason to run and do the next fund that's being offered. They used to look at everything. Now they're being more strategic, considering investments over a five-year period, how they fit in with the rest of a portfolio."
Gary Robertson, vice president, head of private markets, at Callan Associates Inc., San Francisco, concurred. "Investors seem to be staying the course, even though returns and valuations are down. It would be easy to be discouraged, but the best way to improve returns is to keep investing. No one has said they'll stop investing now because they started during the bubble. But they're frustrated now because there aren't a lot of good venture groups out there fund raising. And pension funds that aren't fully funded want to be able to get vintage year diversification."
He added that there seem to be more write-downs every quarter. "At the time, they're (the write-downs) realistic, but unless the economy turns valuations, (write-downs) will be lower in the future."
Quicker is better
Fund-of-funds managers and pension fund officials emphasized that they have been urging their general partners to take their write-downs as quickly as possible.
Clinton Harris, managing partner at Grove Street Advisors LLC, Wellesley, Mass., which manages a $1.3 billion venture funds of funds portfolio for the $131 billion California Public Employees' Retirement System, Sacramento, said he advises his general partners to "be conservative, take your medicine early and write down where it's deserved. Look carefully to see how you valued companies a year or 18 months ago, and if they seem overvalued now vs. then, we recommend changing it. We tell them that if you're not valuing your companies properly, LPs won't trust you and you can only lie to LPs once."
Nevertheless, Mr. Harris said there are some GPs who are hoping that some of their companies will still turn around, and as a result are hesitant to take write-downs; however, most of his funds have taken them.
T. Bondurant French, chief executive officer at Adams Street Partners LLC, Chicago, believes it could take another year or two before the write-down process is completed. "We would guess that we are still only 75% of the way through (the process)."
According to Mr. French's statistics, there were 13,229 venture-backed companies in the industry financed from 1995 to 2002. Approximately 38% of these have gone public, been merged with other companies or shut down. That leaves 62%, or 8,243 privately held companies. He predicted that many will be shut down or merged because of disappointing valuations.