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Article from SFGate.

It’s suddenly a lot harder for venture capitalists and startups to raise funds, as investors fed up with low returns turn their backs on the sector.

Most industry observers agree that lots of young firms will simply not be able to raise their next round of funding, commencing a period of belt tightening, consolidation and closures. At a minimum, it seems to mark the beginning of a more level-headed investment climate in Silicon Valley, after years of insatiable lust for all things mobile and social.

But if the drop-off is too sudden and steep, this new austerity could spill over into an economy highly dependent on the tech sector. Indeed, as The Chronicle reported last week, the industry has an enormous impact, with each tech job creating 4.3 indirect jobs in the community, according to a Bay Area Council Economic Institute report.

The investors and venture capitalists I spoke to insisted that we’re not on the verge of anything like the dot-com meltdown, characterizing the shift as a minor and healthy correction, or a “rationalization.” One suggested it was little more than the usual process of separating good and bad ideas in the marketplace.

But the numbers suggest something new is afoot. In the third quarter, the amount that U.S. companies raised in venture capital dropped 32 percent from the prior year, according to Dow Jones VentureSource. Venture capital funds themselves raised 17 percent fewer dollars from the second to third quarter, even as the number of funds grew, according to a joint report from Thomson Reuters and the National Venture Capital Association.

Economic uncertainty

Some partially blame the economic uncertainty surrounding the outcome of the election and the “fiscal cliff.” But the main problem seems to be that many of the “limited partners” that fund venture capital are pulling back after years of frustration.

Ever since a brief period in the late 1990s when venture capital burned bright, the industry has been delivering consistently weak returns on the whole.

In fact, despite requiring greater risks and larger capital outlays, venture capital has been underperforming the stock market over the past decade, according to a report this year by the Ewing Marion Kauffman Foundation.

Joe Dear, chief investment officer for CalPERS, told Reuters this summer that venture capital “has been the most disappointing asset class over the past 10 years as far as returns.” The huge pension fund for California’s public employees didn’t return repeated calls from The Chronicle.

Investment horizons have steadily spread out, from five to 10 to sometimes 15 years, as exit opportunities like acquisitions and initial public offerings fail to materialize. This has sometimes forced investors to put in more money to protect their initial funds.

‘Pretty grumpy’

“The industry definitely, for the last decade, has been a tough place to be,” said Ray Rothrock of Palo Alto venture capital firm Venrock. “We’re all pretty grumpy right now.”

Some of this is due to macroeconomic conditions outside the control of venture capitalists, notably the housing and banking crises. But at least some of it has to do with poor picks and herd mentality, funding companies with few real prospects and driving up the entry price for legitimately promising companies beyond what they could pay off.

“The market overfunded the number of companies in the system,” said Hans Swildens, founder of Industry Ventures in San Francisco. “There’s a glut.”

Even the grand promise of Web 2.0 companies that lured so much recent money hasn’t generated the hoped-for returns. The ones that managed to go public were often disappointments, including Facebook, Zynga and Groupon, in some cases leaving late-stage investors underwater on their holdings.

That was a final straw for some.

Last week, Forbes dug up figures from CB Insights that highlighted a wide and growing gap between the number of companies that raised initial funding and companies securing the follow-on investments, known as a Series A, generally necessary to keep going. This year, there have been 1,747 seed or angel rounds but only 688 Series A deals, underscoring the coming crunch.

Bad businesses

Based on as scientific a survey as the PR pitches in my inbox, there’s a tremendous number of silly, redundant and poorly executed companies out there that don’t warrant additional funding. The real problem isn’t that many of these companies won’t raise more money; it’s that they raised money in the first place.

For the venture capital industry to get back on track, it needs to embrace a renewed sense of discipline – on company picks, deal terms and total spending.

But hope springs eternal in Silicon Valley.

Rothrock stresses that the industry’s trend-line averages mask very strong results and ongoing investment at top firms, as well as growing venture capital activity among corporations like Google. Companies are just being more selective and looking beyond consumer Internet opportunities.

“We’re steady as she goes in terms of funding enterprise,” he said.

Secondary opportunity

Swildens oversees a secondary fund that buys shares from limited partners and venture firms looking to liquidate part of their holdings. He sees this period as a ripe opportunity for bold investors to get into promising companies at suddenly reasonable rates.

“Ours is one of the few firms aggressively putting money into these funds,” he said.

Mark Heesen, president of National Venture Capital Association, is similarly optimistic. He says the industry could be primed for a strong comeback in 2013, as long as the broader economy strengthens.

Above all, what the industry needs are some wins – acquisitions or initial public offerings that put investors clearly in the black and start to restore some lost confidence.

“If we see these exit markets start to generate good returns, I think you’ll see limited partners look at this asset class again,” he said.

James Temple is a San Francisco Chronicle columnist. E-mail: jtemple@sfchronicle.com Twitter: @jtemple

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Here is an interesting article on Cleantech/ Greentech IPO´s from Earth2Tech.

“Electric car maker Tesla Motors officially delivered the biggest venture backed IPO of the quarter, raising $226 million, according to numbers out this week from the National Venture Capital Association and Thomson Reuters. What made the public debut different from some of the other venture-backed IPOs that happened this quarter? Well, among a variety of things, last summer Tesla managed to score a coveted $465 million in loans from the Department of Energy.

The link with Uncle Sam likely helped allay investors fears over supporting a risky company that has yet to make a profit and doesn’t plan on making any profits for the next two years. Tesla isn’t the only greentech IPO hopeful backed by the government. In fact, a large number of the greentech companies that have been gunning for the public market, or have recently gone public, have significant government support.

Take lithium ion battery maker A123Systems. The venture-backed company raised $371 million in its public debut in 2009, which was the largest IPO of the year, and represented about a third of the overall IPO market that year in terms of dollars raised. A123 secured a sizable $249 million grant from the Department of Energy last summer.

Before Tesla, the venture-backed greentech IPO hopeful of the hour was solar panel maker Solyndra, which hosted a speech by President Obama in May. Last year the company won a whopping $535 million loan guarantee from the U.S. Department of Energy, and that loan guarantee translated into a loan from the U.S. Treasury. However, despite the government support, investors’ appetites for solar, and Solyndra’s, IPO just wasn’t there and Solyndra ended up ditching its IPO plans last month, in lieu of raising funding from its current investors.

This week, shortly after Tesla’s IPO, an investor behind another venture-backed and government-supported electric car maker suggested it will also one day go public. That would be Fisker Automotive, and Ray Lane, the Kleiner Perkins venture capitalist and former Oracle executive, said this week that “Certainly we would plan to sell shares in the public market once the Karma is on the road and we have visibility into the revenue plan.” In April Fisker closed a $528.7 million loan agreement that will be used to help the startup launch its luxury plug-in hybrid model and set up manufacturing in Delaware for a line of lower-cost plug-in hybrids.

Smart grid company Silver Spring Networks, which has been planning an IPO for the last six months, might not have direct government support, but the close to $4 billion in funds for smart grid projects from the U.S. stimulus package has been a major boon to its utility customers. The Silver Spring folks told me in an email last year that the funding “will go a long way toward accelerating and broadening deployment of the critical smart grid infrastructure.” Silver Spring is working with stimulus award winners Florida Power & Light, Oklahoma Gas and Electric, Sacramento Municipal Utility District, PHI Holdings (including PEPCO, Atlantic City and PEPCO DC) and Modesto Irrigation District.

Other rumored greentech IPO hopefuls (here’s Earth2Tech’s 10 Greentech IPO Picks) that have some sort of government support include solar thermal developer BrightSource Energy and Smith Electric Vehicles. BrightSource received a commitment earlier this year from the Department of Energy for a $1.37 billion loan guarantee to build out BrightSource’s Ivanpah solar project, which is set to be the first new solar thermal power plant built in California’s deserts in 20 years. Smith Electric Vehicles won a $10 million DOE battery grant last summer, and added $22 million under the same program in March.

Of course, not all of the greentech IPO candidates are under the wing of the U.S. government. Biofuel developer Amyris is planning a $100 million IPO without direct government support. But the odds are if you see a greentech startup hit the Nasdaq it’s got Uncle Sam in its corner.

The reality says a couple things about the greentech industry and the IPO market in general. First the IPO market for venture-backed startups is actually relatively weak right now. A significant amount of companies have actually pulled their IPOs in recent weeks and that extra bit of confidence via government support can help push these plans onto the public markets (Solyndra as the exception).

Another issue is that many of the government loans, grants and loan guarantees given to these greentech startups come attached with a cost-sharing requirement over a certain time frame. To unlock the full extent of the government funding companies like Tesla and Solyndra have to raise their own matching funding, by a certain date, and many are turning to the public markets for that.”

Read the whole article here.

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Here is some not-so-exciting news from Businessinsider.

“The third quarter was rough for VCs, with 17 firms raising just $1.6 billion. That’s the fewest firms to raise money since 1994, and it’s the smallest amount of money raised since Q1 2003, says the NVCA and Thomson Reuters.

It’s an 81% drop from a year ago, and a second quarter of declines.

There were three big raises–Andreessen Horowitz with $58.5 million, Vinod Khosla’s fund raised $750 million, and Draper Fisher Jurvetson raised $196 million. Without those funds, it would be a nightmare.”

Read the full article here.

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Here is article from USA Today. As the crisis starts to ebb out, the downsizing has produced piles of cash at some companies.

“SAN FRANCISCO — There could be a thaw in the months-long stagnant market for tech mergers and acquisition.

Data-storage companies EMC (EMC) and NetApp are dueling to buy Data Domain for at least $1.8 billion. Last week, chipmaker Intel (INTC) said it would buy testing and development software maker Wind River Systems for $884 million.

The quarter’s big catch was when Oracle (ORCL) snapped up Sun Microsystems for $7.4 billion.

While hardly a buying spree, the uptick could signal a break for what has been a sluggish tech M&A market since the third quarter of last year.

So far, $17.9 billion has been spent on tech mergers in the U.S. in the current quarter — more than the previous two quarters combined, according to market researcher Thomson Reuters.

The activity reflects one byproduct of a sour economy: Big tech companies sitting on piles of cash are willing to spend some of it to aggressively pick up innovative start-ups as well as rivals with customers and market share.

The deals come at a time when venture capital funding is scarce for start-ups and there are scant initial public offerings.

“People historically make their money when they invest consistently, even during downturns,” says Keith Larson, vice president of Intel Capital, the company’s venture-capital arm. The company has said that it will spend $7 billion over two years to build advanced manufacturing facilities in the U.S.

“Almost the worst thing you can do is pull back during a downturn and miss out on buying opportunities,” Larson says. “We have a multiyear road map on the technology side.”

Cisco Systems CEO John Chambers, who has navigated the venerable network-equipment maker through several downturns, has said companies willing to take calculated risks often emerge stronger from recessions.

A few established companies with ample cash reserves this year have bolstered their war chests with the intention of snapping up companies.

Cisco (CSCO), which sold $4 billion in bonds in February, has about $33.5 billion in cash reserves. It acquired Pure Digital Technologies, maker of the popular Flip video camera, for $590 million.

“If you have cash, it is a good time to fortify product lines and fuel growth,” says Cynthia Ringo, managing partner for VC firm DBL Investors.

So far this quarter, there have been 239 deals in the U.S., including the Oracle-Sun blockbuster. In the first three months of this year, there were 313 deals.”

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With a worse than bad report coming out of its first quarter, Yahoo is struggeling to find ways to stand on its own.  In the wake of Oracle/ Sun merge, next large Silicon Valley merge may come very soon. Microsoft who was once considered a no-no in the Valley may look like a saviour!

Here are some coverage tidbits from PCWorld.

“Yahoo had revenue of US$1.58 billion, down 13 percent from the first quarter of 2008 but higher than the $1.20 billion consensus expectation from analysts polled by Thomson Reuters.”

“Meanwhile, net income fell 78 percent to $118 million, or $0.08 per share, compared to $537 million, or $0.37 per share, in the first quarter of 2008, the company said Tuesday. On a pro forma basis, which excludes certain one-time items, Yahoo had net income of $206 million, or $0.15 per share, down 16 percent and 17 percent, respectively, compared to the first quarter of 2008 but exceeding by seven cents per share analysts’ expectation.”

With these bleak numbers, cutbacks will only solve parts of the fundamental problems.

“This time around, Yahoo will let go 5 percent of its staff worldwide. Yahoo ended 2008 with 13,600 employees, so this would mean that about 680 people will be laid off. Yahoo handed out pink slips to about 2,600 employees in two rounds of layoffs last year.”

One may wonder if this is the preparation for a merge with MSFT.

Other coverage on this story can be found at;  YogiMassMedia NowErik Bowman , 24/7 Wall Street

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To no ones surprise, the VC community pulled in its spending spree and held back in the wake of the financial crisis. The recent report release by NVCA (National Venture Capital Association) this last weekend. A funny detail in the mix is that they release the data on saturday afternoon, after all media stopped their coverage for the weekend!

“Venture capitalists invested just $3.0 billion in 549 deals in the first quarter of 2009, according to the MoneyTree™ Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly investment activity was down 47 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion was invested in 866 deals. The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997”

Overall, its not good news. In specific areas, the analysis continues;

“The Software sector received the highest level of funding with $614 million going into 138 rounds, a drop of 42 percent in dollars and 34 percent in deals compared to the fourth quarter of 2008.”

“The Life Sciences sector (Biotechnology and Medical Devices combined) experienced a 40 percent decline in terms of dollars and a 31 percent drop in deals with $989 million going into 133 rounds. Investment in Biotechnology fell 46 percent to $577 million in the quarter, while Medical Device investments fell 27 percent to $412 million. Investments in Life Sciences companies represented 33 percent of all investment dollars and 24 percent of all deals in the first quarter, which is in line with historical norms.”

For the whole pressrelease, click here. For additional coverage on this story see; ABF Journal, The Batts report.

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