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VC firms in a two-quarter slump

Venture firms post negative returns in the first quarter, marking two straight quarters of red ink.

Venture firms posted negative returns in the first quarter, marking two consecutive quarters of red ink.

U.S. venture firms posted an 8.9 percent loss in the first quarter, according to results released Wednesday by research firm Venture Economics and the National Venture Capital Association. The figure represents actual gains and losses to the venture funds, as well as unrealized gains and losses.

The first-quarter figure follows a loss of 13.4 percent in the fourth quarter. Both of these figures also contributed to a 6.7 percent negative return over a 12-month period--an industry record.

These latest results represent more dour news for an industry that has been tightening its investments into start-ups and has been feeling the pinch from their limited partners who are now more hesitant to put more money into deals.

And the future does not look much brighter.

"I think we'll continue to see these lower returns in the second quarter and for the year," said Jesse Reyes, vice president of Venture Economics. "I think they'll be flat to slightly down."

Despite the first- and fourth-quarter losses, some limited partners like Brent Townshend have decided to participate in venture funds.

Townshend decided to expand his investment strategy six months ago from angel investing to include venture funds. As a new limited partner, the funds he invests in are not saddled with the high valuations that a number of VCs paid during the booming 1999 and early 2000 period.

"I wouldn't want to be an investor in a maturing VC fund," Townshend said. "They're hampered by a lot of legacy investments that are now souring."

Limited partners who invest in VC funds are typically in for the long haul. The life of a fund usually spans 10 years, with the majority of initial investments made in the first several years and with returns often not realized until four to six years later.

Venture funds formed in 1998 and 1999 are likely to have a hard time doling out substantial profits to their investors, given the high prices they paid for their investments, Reyes noted.

The environment is quite a contrast to just three years ago, when venture firms posted nearly a 56 percent return to investors, according to Venture Economics. However, recent events have not scared off investors entirely.

"I don't think the limited partners are surprised by these figures," Reyes said. "They're in it for the long term and know there are up and down cycles. The ones who may be concerned are the ones who jumped into private equity investments in the 1998-1999 period. And if they weren't in a top fund, they've probably got a bad taste in their mouth now."