VC firms will adapt to shaky market, report says

Although association representatives said growth of venture funding between the first and second quarters of this year will fall short of the 85 percent record, it will remain healthy despite a rocky stock market that has been hammering publicly traded technology companies since late March.

"The money has not dried up," said Jean Metzger, director of marketing at the Arlington, Va.-based trade group. "The venture capitalists are long-term investors; fluctuations in markets don't impact the amount of money they're investing."

But stock market gyrations are forcing venture capitalists to scrutinize their investments more carefully. The tech-heavy Nasdaq composite index sank roughly 37 percent from March to May. In addition, shares of many young tech companies are trading in the single digits, and the market for initial public offerings has withered.

The drubbing has prompted many venture capitalists to pressure technology companies to find alternative "exit strategies" instead of the traditional route of launching an IPO, typically on the Nasdaq.

Many late-stage venture capitalists, so-called mezzanine investors who acquire equity shortly before companies go public, are urging them to postpone their IPOs until the market stabilizes. Others are waiting for their companies to be acquired.

"The stock market has slowed down the mezzanine guys a lot. The irrational exuberance has gone away," said Michael E. Frank, general partner at Waltham, Mass.-based Advanced Technology Ventures. Of the eight companies Advanced Technology has funded and that have filed to go public, only two are proceeding with an IPO.

Several high-profile e-commerce companies put off IPOs this week.

Kozmo.com, an online delivery service for customers in New York, San Francisco and other cities, is postponing its $150 million IPO, led by Credit Suisse First Boston. Kozmo filed its IPO plans March 21, only days before the Nasdaq began its spring spiral.

Furniture.com is also bailing out on IPO plans. The Framingham, Mass.-based online furniture retailer hoped to raise $50 million with lead underwriter Goldman Sachs. Instead, it announced it has raised $27 million in private equity financing.

Experts also say the stock market collapse could spark a shakeout among an increasingly crowded field of venture capitalists.

In the 1970s and 1980s, venture capitalism consisted primarily of wealthy patrons who showered money on entrepreneurs with interesting ideas--especially technophiles in places such as Silicon Valley.

But in the 1990s, venture capitalism emerged as a multibillion-dollar industry with hordes of investors, from obscure research parks to polished investment banks. In the past three years, even inexperienced venture capitalists got rich as the stock market indiscriminately rewarded many technology companies capitalizing on the Internet boom.

"The high returns were attracting people to the industry who weren't well qualified," Metzger said of the stock market thrashing, which has particularly slapped e-commerce companies. "The VCs newer to the market will get weeded out. Venture capital is a survival-of-the-fittest industry."

Despite the recent turmoil among tech shares and the IPO market, there are indications that investors are again warming up to tech shares and IPOs.

Yesterday, the Nasdaq passed 4,000 for the first time in more than two months. In addition, 12 companies are scheduled to begin public trading this week, compared with an average of five per week in May and June, according to market research firm CommScan.

This week's deals are expected to raise $8.5 billion, compared with an average of less than $1 billion raised during each of the past 10 weeks, according to Richard Peterson, an IPO analyst with Thomson Financial Securities Data.