VC Vital Signs Still Strong After Attacks

Although the world has been irrevocably changed by the tragic attacks waged on America last month, the venture capital community will likely survive the near-term economic impacts and be able to pull through for the long haul.

So says a report released last week by the National Venture Capital Association (NVCA) concerning the state of the VC industry in light of the faltering economy and the terrorist attacks of Sept. 11.

Certainly, the emotional impact will be felt for quite some time. Many within the close-knit VC community have been affected personally by the devastating losses resulting from the attacks on the World Trade Center and the Pentagon – including the deaths of Alta Communications’ David Retik and Chris Mello, and Blue Capital Management’s Brian Dale, all of whom were aboard American Airlines flight # 11 when it crashed into One World Trade Center.

Still, the venture capital industry has been resilient in the past, and will likely bounce back from the short-term effects in relatively quick order.

Picking Up The Pieces

There are a few hurdles to overcome first, however. Venture capitalists have voiced concerns that there will be an immediate lapse in investor confidence. As such, VCs expect to see the pace of new deals continue to slow over the next few months, as investors wait to see how the economic impact of the attacks and their aftermath ultimately plays out. Additionally, the report shows there is a heightened concern that the public markets will continue to remain closed to new issues, and that the resurgence of the mergers and acquisitions market will be delayed even further.

Some VCs are a bit more optimistic, however. “We’re not changing the terms on the deals we’re doing right now. I fundamentally believe there’s still a chance for a v-shaped recovery here,” said Mark Leschly, a managing director with Rho Ventures in New York. “VCs tend to focus on years. If a fund is invested in terrific companies, I believe there will be great upside over the long haul. We’ll do the usual things to protect ourselves and mitigate risk, but we don’t anticipate slowing down or dramatically changing [the way we] invest now.”

In truth, it seems that many of the prevailing trends that pervaded the venture capital industry prior to the events of Sept. 11 continue to do so in their aftermath. For example, VCs are tightening their belt loops just as they have been for the past 12 to 18 months, funding only companies with proven business models and strong management teams. Moreover, they are continuing to set aside reserves to help buoy their existing portfolio companies and make sure they are adequately funded to get beyond the current economic slump.

“This [has had] more of a back to basics impact,” said Polly Schneck, a partner with Labrador Ventures. “It gets back to how VCs have always been, in terms of [investment] life cycles, the time to exit we expect from companies, the amount of capital companies require to attain a successful exit.”

What is more, there is an abundance of capital out there still to be invested, and it isn’t likely that VCs will sit on their heels forever, Schneck added.

Indeed, the NVCA estimates that the capital “overhang” for venture funds at the end of Q2 2001 was in the neighborhood of $45 million. While much of that capital will likely serve as reserves for existing portfolio companies, some will surely be used to finance early-stage companies, where the opportunity for new investments is still quite strong, the NVCA report stated.

Getting Back To “Normal”?

In the short term, the VC industry may be most impacted by the increased difficulty of travel with heightened security at the nation’s airports. While VCs said they are thankful for that security, they also believe it will hamper the efficiency of their business.

“Plans for travel will likely take much longer, and it will be a nuisance to do,” Rho Ventures’ Leschly said. “Fundamentally and statistically speaking, though, [flying is] probably still safer than driving a car. In the venture business, it’s important to be close to companies, and we want to get back to doing business as usual.”

Still, there may be some VCs that are reluctant, to say the least, to board an airplane. As such, many may be looking closer to home for new deal flow, which will likely give rise to a boost in regional investing.

One thing is for certain, and that is that the venture capital industry will remain a strong force that will fuel the growth of the U.S. economy moving forward. What is more, it is unlikely that the entrepreneurial spirit of innovation that had been an American trademark will be at all stymied by the attacks.

Pat Hopf, a managing partner with St. Paul Venture Capital, perhaps summed up best the resiliency of American entrepreneurs.

“The U.S. has long been distinguished by an indomitable spirit of entrepreneurship and a willingness to take risk, and this spirit may be rekindled as a part of the healing process,” he said. “One person with a great idea can make a difference, as this nation has proved for over 225 years, and the truly great ideas are more likely to rise to the top during periods of crisis.”

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