Survey predicts dim future for venture capital firms

Bloomberg News

NEW YORK — As many as a third of U.S. venture capital firms will fail due to losses stemming from the collapse of Internet startups, according to a survey of Silicon Valley and East Coast venture capitalists.

Seventy-eight percent of respondents said they expect 10 percent to 33 percent of venture capital firms to go out of business, the Deloitte & Touche poll showed.

A fall in technology stocks — the Nasdaq Composite Index has slipped more than 50 percent from its March 2000 high — has already led to the closure of a number of venture capital companies.

"In this environment, it is more important than ever that entrepreneurs choose their funding partner carefully," David Clark, a managing director at Deloitte & Touche, said in a statement. "They need a VC that is focused on the long-term development of their business and one that is not distracted by other issues."

Scores of venture capital funds were formed in recent years as Internet fever drove the stock market to record highs. In 1999, first-time funds accounted for about one-fifth of the $60.2 billion of venture capital raised, according to the National Venture Capital Association and Venture Economics.

As the market fell, a number of firms have foundered. Octane Capital — started by former executives of Amerindo Investment Advisors Inc., Goldman Sachs Group Inc., Capital Research and Management Co. and Tiger Management — said in April that it would halt new investments and return money to investors.

There were some bright spots in the survey.

For the first time since January, venture capitalists said they expect the technology investing climate to stabilize and spur further investments. Seventy-two percent also expect fledgling companies will continue to raise money.

More than 41 percent surveyed said they expect to spend the majority of their time on new investments "rather than sick portfolio companies."

The Silicon Valley and East Coast Venture Capital Confidence Survey asked more than 2,000 venture capital executives, who manage funds with assets exceeding $50 million, to forecast trends for the next six months.