Venture Capitalist Returns Hit the Skids

Funds managed by venture capitalists dropped by an average of 6.3% in last year’s final quarter as the dot-com downfall dragged down the financiers who helped bankroll the e-commerce boom, according to statistics released Monday.

The setback marked the venture capital industry’s first quarterly losses since the third quarter of 1998, said Venture Economics, a Thomson Financial research firm that compiled the report.

The losses came on the heels of a 6.4% gain in last year’s third quarter.

The about-face in the fourth-quarter represented the most severe three-month erosion in venture capital returns during the 20 years that Venture Economics has tracked quarterly performance.

“The pendulum has swung and it’s going to get worse. We are just seeing the tip of the iceberg now,” predicted venture capitalist Philip Sanderson of WaldenVC in San Francisco.

Despite the hemorrhaging at the end of the year, venture capitalists still delivered a 37.6% return to their investors for all of 2000, even as all the major stock indexes plunged in value.

Although their returns held up better than the stock market’s major barometers, there’s no denying that venture capitalists are in the throes of a deepening slump.

The industry’s quarterly returns have been decaying since reaching a peak of 59.4% for the three months ended in December 1999. And industry experts say there is good reason to believe the venture capital tailspin will accelerate this year.

That’s because many venture capitalists still haven’t fully recognized the rapidly declining market values of the dot-com companies in their investment portfolios. Since their privately held holdings aren’t re-priced by the public stock exchanges every day, venture capitalists generally don’t have to be as aggressive in registering their losses.

But venture capitalists eventually will have to put more realistic appraisals on their books and, as they do, their losses are expected to continue to pile up.

With returns falling and institutional investors less eager to hand over money to venture capitalists, the industry is expected to start shrinking this year after several years of rapid expansion.