Recently the Duke University Blue Devils Mens Collegic basketball team won the NCAA Championship with a thrilling victory over the Arizona Wild Cats in the final game. The Semi-finals, which included two other highly ranked collegic teams, Michigan State and Maryland, together with Duke and Arizona, were the 1st, 2nd, 3rd and 6th ranked teams in the country at the regular season’s end. When asked about the lack of a surprise Cinderella team from the 65 candidates in the final four, Duke’s great and revered coach Mike Krzyzewski stated: "We could have played this thing in November and saved a lot of trouble." This mirrored a sentiment prevailing in the financial sector currently, the "I told you to expect this" scenario. It seems like everyone knows someone who somehow predicted the past year’s technology market’s "fall from grace." Surprisingly, although many claim to have predicted the "Dot com demise," few actually avoided the hysteria or benefited from the short-side. It’s easy, as Coach K is affectionately known in the basketball circles, to say we could have avoided going through it; it’s much more difficult to actually DO IT as Duke recently did.

The public equity markets have, until very recently, remained "irrationally depressed", a twist on Mr. Greenspan’s now famous line. Most investors have suffered huge paper losses. Yahoo, one of the internet bell weathers, is of course an excellent example of why the bubble burst. In mid 1999, Yahoo’s market valuation (currently under $10 Billion) was an astounding $150 Billion, twice that of Disney! It’s revenues which grew quickly to $1.1Billion in 2000 was fueled by artificially inflated spending generated by VC and IPO cash-laden companies who spent freely on Web advertising and IT equipment. With Web advertisers suffering and the private and public markets stifled, expect Yahoo’s revenues to fall 30% this year (Goldman Sachs projections, Red Herring Magazine April 15th, 2001). Its stock is down approximately 90% over the past 18 months.

Angel Investors, due to their market losses, are much less likely to write that second or third check. This hurts numerous incubated, start-up technology companies as they often run low on funds just when they finally reach value on a strategic or applicable basis. The failure rate for start-up companies is not new (it has always been 90%+); it is just that this is the first time most investors have been allowed to share in the carnage. Much of the lost wealth involved "Dot Coms" that, instead of a subsequent or final rounds of private financing, went public just because "they could." We, the investing public, not only allowed this but, in our greed, bought up their shares to ridiculous prices. Founders were ecstatic as they preserved more equity for themselves, did not have to negotiate further rounds with difficult "cram down" VCs and created incredible paper wealth; VCs were likewise pleased as the lofty public market valuations made their fund’s paper performance look great thus enabling them to receive additional capital. Furthermore, the public’s money reduced the VC’s exposure thereby allowing investments in more start-ups and spreading their risk. As the lines between the private and public markets blurred spurred on by outfits like Garage.com, Offroad Capital and the publicly traded MEVC, whom offered high net worth individuals and common investors a way to play in the VC game, a vicious cycle ensued. We all know what happened next, the bubble burst!

Venture capitalists are taking a hard look at their investment portfolios and are putting all their resources behind their most promising companies. Thus, many start-ups are not getting funded, numerous others will not secure additional financing and are being shut down or sold/merged at steep discounts to their prior round’s valuation. For the first time in years, venture capital returns to limited partners fell into the red in the fourth quarter of 2000 according to Venture Economics. Early/seed and late stage funds both had negative returns which reduced a significant percentage of the positive returns generated during the first three quarters.

VCs are still raising money and doing deals, albeit for more "old economy" type companies with proven business models. Great opportunities still lie ahead on the internet, revolutionary technology is discovered every day and of course the bio-tech market is booming again. E-commerce is still evolving and the failure of a high percentage of new economy companies should be nothing new. Note, there were over 100 automobile companies started in America after the model T came into vogue and although few survived, we know how powerful those companies are today. Investors need a better and clearer understanding of the fundamental dynamics of venture capital and should not shun new opportunities because of alarming headlines or the bursting of an absurd, self-inflicted bubble. The filtering of bad businesses simply create better opportunities for the good and/or promising companies. Since you can not undo previous mistakes, proceed, but with extreme caution!

NOTE: This report was produced by Wellfleet Partners, Inc. ("WPs") from various public research sources, for the sole purpose of general information. WPI makes no warranties to its factual content and is not a brokerage firm, registered Investment Advisor nor securities dealer; therefore, nothing contained in this report shall constitute an offer to sell, solicit or buy any securities or investment advice. Investment in these securities mentioned here involves risk and should not be considered without first reading the target Company’s most recent financial statements, 10Q and 10K, its Private Placement, Offering Memorandum or Business Plan, if applicable, and discussing the investment with your registered representative or professional financial advisor. Venture capital is inherently extremely risky. Mark I. Lev, Managing Director of WPs, is a registered representative of KSH Investment Group, Inc. a NASD member broker-dealer.