You may think it a stretch, but our VC community and
fashionistas are cut from the same cloth. This theory became perfectly clear to
me once again at the NYSIA VC briefing held on Tuesday, October 16 at the
lovely traditional offices of Dorsey & Whitney.
One of the main reasons why NYSIA organized this
breakfast to announce the NYSIA Index, which is produced in conjunction with
Venture Wire and will track IT and software development in New York and
compare/contrast it to development nationally and in other leading tech cities
like Boston and Silicon Valley. As NYSIA president Bruce Bernstein stated,
“obviously the volume is down in investments 60 – 80% and the government has to
help stimulate New York if it is to recover economically.”
NYSIA will also lobby the government at state
and federal levels to earmark funds for rebuilding New York to the technology
sector. As he stated, “NYSIA wants to nurture Silicon Alley.... New York was
clobbered on September 11th and if you weren’t clobbered physically
or emotionally, which all New Yorkers were to some extent, companies are still
suffering because they have clients that were affected, projects were put on
hold and clients were displaced and dispersed. There is a lot of money aimed at
IT rebuilding and [he] will be figuring out how to get that to Silicon Alley.”
Finally, giving a tip of the hat to the
investment opportunities in Silicon Alley, he stated that in the wake of the
downturn, “there’s a lot of seaweed on the beach,” which is a good thing. Bruce
invited RRE Ventures’ Stuart Ellman, Lazard Technology Partners’ Gene Lowe and
Commonwealth Associates’ Michael Ritchitelli to speak on VC investing during
this slow time because they are the most active and yet below the radar screen.
As you’ll see from their comments, they have a seasoned perspective and
positive outlook on the steady course for the future.
After an hour of discussion one of the reporters
present asked whether these firms were opening satellite offices to focus on
biotech. Since the focus of the morning was on IT and software in Silicon
Alley, the mood turned a bit defensive and one VC shot back that “as a reporter
you can do that – follow the trends, but VCs need to be 12 – 18 months ahead.
Hence my fashion analogy; the fashion world is already working on Autumn 2003!
To catch all the tasty morsels the VCs tossed
out to us, click here: http://www.thecyberscene.com
Here are the comments from the VCs as noted:
Stuart Ellman:
In 1999 everyone was a VC and today it’s as if
you’re a leper. There are a lot of VCs not knowing where they’ll put their
money. Some sound outright defeatist with the viewpoint that “this has been a
terrible year, we’re just going to ride it out.” However, as a rule VCs get a
reward for taking a risk. He expressed frustration with the analogy of why
terrorists should even affect the IT industry. He cited a quote that goes,
“where there’s fear, seek greed; where there’s greed, seek fear.”
With so many of the VCs exiting there is a
greater opportunity for investments. Pricing has dropped to an irrationally low
number and has nothing to do with how much capital has been raised. Another
positive of this slow time is that there is more time to do due diligence,
whereas during the heyday if you spent too much time you might miss out on the
opportunity.
Historic investing was at a rate of two deals
per partner a year. They are operating at this rate now and will have 3 deals
by the fourth quarter. They aren’t looking at any early stage investing now,
they’ll do deals that are more mature but at the same price. Industrial Pension
Funds are over allocated. It’s more political to put it in a leveraged buyout
as opposed to a hot potato.
Before, a lot of the firms in Silicon Alley were
advertising and marketing based; now they are more tech oriented. Stuart was
particularly enthusiastic about Juice.com, one of their investments.
RRE Ventues raised $93 million for their first
fund, $225 million for their second fund and they are just finishing their
third.
Gene Lowe:
Restating the obvious Gene commented that there
are no IPOs currently and investments are down 90%.
Last year there were four times the number of
VCs around as there are this year—echoing Stuart’s comment on how everybody was
getting into the game.
A good thing about all the investment from last
year is that there was $100 billion in VC raised that needs to get put to work.
Furthermore, there is less competition, the competition is smarter and there is
a great ability to get great CEOs and management teams for firms.
The Lazard Fund was founded by two gentlemen,
Russell Planitzer and Kevin Burns, who ran software companies and approached
investing from a fundamental point of view.
Gene commented that at some points during the
wild days, when everyone was reading about the big deals by a few very
publicized firms, they felt like they might have missed out on an opportunity
or two, but now of course their point of view is much more different. Lazard
continues to look at things like revenue and profit margins when considering a
company and feels this is the best time to be investing.
Lazard’s first fund raised $100 million in 1998,
which has been all invested. Their second fund had a target of $250 million but
finalized at an oversubscribed $305 million. Last year they did 10 – 12 deals,
this year they’re doing 7 – 10. Furthermore, while their investments tended to
be more early stage, now they are doing more mezzanine investments.
Michael Ritchitelli:
Unlike his colleagues at the breakfast, Michael
and Commonwealth focus on private investment in public companies (PIPE) in
technology. A lot of their clients now are companies that went IPO too soon and
are in still in growth mode. The firm has been handling this type of investment
for 14 years. Last year they invested $240 million in public companies but this
year they’ll have invested in $65 – 75 million. Their rate of investment is at
the traditional rate of two to three deals per partner a year.
One of their big problems is pricing because the
market caps have gone down so far and there’s a problem with dilution. However,
they are still bullish on technology firms and are looking at wireless, the
enterprise market in wireless, healthcare and one particular Silicon Alley broadband/streaming
company! Michael was also enthusiastic about a company that specialized in
storage software and is bullish on the amount of sheer talent and deep
knowledge in New York City. There are great investment opportunities still
abound.
