Saturday August 4 9:32 AM ET

VCs Backing Off Silicon Valley After Tech Bust

By Jim Christie

SAN FRANCISCO (Reuters) - Now that so many high-tech start-up companies in Silicon Valley have failed and so many high-tech jobs have been lost, some of the people who stood to make the most from high-tech investing are leaving, too.

Venture capital investments in California's Silicon Valley and San Francisco, the U.S. Internet sector's heartland, fell more sharply during the second quarter than in any other region, a report issued earlier this week said.

The National Venture Capital Association, an industry group, and research firm Venture Economics on Monday said that Northern California's share of U.S. venture capital for start-ups fell to 29.5 percent in the second quarter from 32.5 percent in the first quarter and 34.1 percent in the year-ago period.

Venture capital investments in Northern California also fell in dollar-terms. Deals in the second quarter totaled $3.14 billion, down from $3.94 billion in the first quarter and from $9.28 billion the year before, according to NVCA and Venture Economics.

Even more striking, the number of new companies in the region to receive venture money plunged from 521 in the second quarter of 2000 to 275 in the first quarter and 253 in the second.

The sagging numbers should have been expected, Dan Lankford, a partner with Menlo Park, California-based venture capital and executive search firm Brown Venture Associates, said.

``It's almost like a hangover after a big party. The whole thing got out of kilter.''

FEWER DOLLARS CIRCULATING

A number of factors are behind the declining venture dollars and deals, NVCA Research Director John Taylor said.

First, Northern California was bound to see a pull-back in venture investing from last year, when venture capitalists committed a record $92.9 billion. By contrast, NVCA said Monday it expects $45 billion in venture deals in the region this year.

But it is not just that the venture capitalists are waiting for better times in Silicon Valley. They have started to cast wider nets.

``The whole entrepreneurial economy is spreading out from California, so it's not surprising that we are seeing a decline in California's share,'' Taylor said. ``For calendar year 2000, we identified venture capital transactions in 48 states and the District of Columbia.''

Certain kinds of Northern California start-ups no longer hold much appeal for venture capitalists.

``We're definitely talking about Internet and e-commerce companies, especially where investment was in companies that did e-commerce, as opposed to companies that enabled it,'' Taylor said.

Complicating matters is uncertainty about which new technologies will emerge to allow start-ups to become self-sustaining private companies or tomorrow's line-up of initial public offerings and acquisition targets.

``It's not real clear where to deploy capital,'' said Tom McConnell, a general partner with Menlo Park-based New Enterprise Associates and NVCA's chairman. ``We're spending a lot more time working with existing companies than investing in new ones.''

SAN FRANCISCO SUFFERS

Many risky venture-backed Internet start-ups that turned San Francisco into the Web industry's Mecca in 1999 and 2000 have had funds cut off. And local entrepreneurs who continue to have online ambitions are not able to sign deals.

One very visible local result: San Francisco has become a graveyard for failures in the first-wave of Internet start-ups, filling plots with major flops, such as Pets.com (Nasdaq:IPET - news), and many minor ones as well.

The closings are taking a toll on San Francisco's economy.

In the city's South of Market area, a scruffy industrial zone that turned into a trendy district for dot-com office space, commercial vacancies now are running at 20 percent, up from 0.6 percent 18 months ago.

Also, more people are moving away from San Francisco than into it as dot-com layoffs mount and as the glamour of Web-site work turns to dross.

Additionally, San Francisco's dot-com implosions are helping drive the city's jobless rate higher: It rose to 3.7 percent in June from 3.1 percent in May and 2.4 percent a year earlier.

But many local venture capitalists said they are not about to give up on San Francisco or neighboring Silicon Valley because each has too much human capital and too many new business ideas to be ignored.

Additionally, venture capitalists like to stay close to their investments, said Phil Sanderson, a general partner with San Francisco-based venture firm WaldenVC.

``True venture capital is very hands-on,'' Sanderson told Reuters. ``When a company is local, you can meet with it more often and in times of crisis.''

-- Anonymous, August 05, 2001