Crosspoint’s Freeze on Fund May Cast Chill on Other VCs
The venture capital community, already battered by the stock market’s plunge this year, was shaken again early this month by news that well-regarded player Crosspoint Venture Partners has abandoned plans for a $1-billion fund.
The decision has created a brouhaha in the VC world and might prompt some large institutional investors to rethink plans to invest more capital with venturists in 2001--especially in the case of smaller, newer funds.
Now, other VC firms, including some in Southern California, also are expected to put a freeze on new funds next year, even as some veteran venturists go ahead with fund-raising plans.
“This is a stink bomb that Crosspoint let off,” said one major investor at an East Coast institution that did not want to be named. “I read it loud and clear: It means this large fund with an excellent track record expects the market to be soft for the next two or three years.”
Indeed, Crosspoint, based in Woodside, Calif., said it was canceling the $1-billion fund because it perceived a shortage of viable investment opportunities.
“The environment of the last five years has been ‘more and more of everything,’ and it’s our assessment that that is over. We just wanted to say ‘Hold it,’ ” said Bob Hoff, a partner in Crosspoint’s Irvine office.
The Crosspoint move is a highly unusual one, especially for a venture firm with a track record of financing many strong companies. The firm, which helped fund such companies as Ariba Inc. and Juniper Networks, had raised an $850-million fund earlier this year.
Typically, VCs abandon a planned fund only if there is some sort of malfeasance or a key partner suddenly dies, venture capitalists said. In Crosspoint’s case, the fund’s investors had already given their commitments.
“We spent a great deal of time talking about [Crosspoint’s move] and considering its implications,” said Ravi Mohan, a general partner in the San Mateo office of Battery Ventures, a large venture fund.
Venture capitalists raise money from wealthy individuals and large institutions to invest in fledgling, risky companies. In recent years, venture returns have been extremely lucrative, with some funds posting returns of 500% or more as the companies they financed--primarily in technology--went public or were bought by other firms.
But the crash in the Nasdaq stock market this year has devastated the values of many public tech companies. What’s more, the new climate means it is far harder for many young companies to go public. That means venture investors in many private firms now might have no exit strategy in the near term.
“We all look at this environment, and none of us think it’s the same kind of market we’ve had for the past few years,” said Brad Jones, a managing partner at Redpoint Ventures in Los Angeles. “It’s going to be a lot tougher to make money.”
Through the third quarter, however, investors continued to pour money into venture funds that would take it: Venture Economics, a data service of the National Venture Capital Assn., said the industry raised $27.9 billion in the quarter, up 153% from a year earlier.
Big funds have been particularly popular this year. More than 10 funds of $1 billion or more have been formed, compared with four in 1999, Venture Economics said.
But with returns on venture funds overall expected to be flat to negative this year, VC firms should expect fund-raising to slow in 2001, said Jess Reyes, an analyst with Venture Economics.
“The cutback in the market capitalization for publicly traded companies obviously reduces the enthusiasm for people putting their money at risk,” said David Fogelsong, a partner with Alcatel Ventures, a Los Angeles venture fund. “People are going to get a lot more selective about which funds they invest with, if any.”
“It’s going to be especially tough for the new funds to raise any money from investors,” Reyes said. He predicts many investors will try to play it safe by putting money with venture firms with established track records.
Yet Crosspoint’s decision shows that even veteran firms might choose to simply hunker down, opting to set aside more money to assist current portfolio companies through tough times, rather than to bet on new ideas.
Still, many major investors insist they are in the venture market for the long haul. “We’re not changing our strategy,” said Phil Rotner, a managing director of private equity for MIT. “You’ve got to invest through the cycles. This is a long-term asset class.”
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Times staff writer Debora Vrana can be reached at debora.vrana@latimes.com.
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