The statistics tell a sad story and help explain why venture funding is moving slower these days than the drive-thru line at a local fast-food stop.

A review of information supplied to Local Tech Wire by dozens of venture firms in North Carolina and Georgia shows more than $900 million of untapped money in investment funds put together over the past couple of years.

Noro-Moseley Partners in Atlanta, for example, has $200 million alone. Intersouth Partners in Durham has north of $90 million. And Carousel Partners in Charlotte has yet to tap a $155 million fund in raised last year.

Yet fewer than two dozen venture financings have been completed in North Carolina and Georgia through the first two months of the year, about half the pace of the deal flow during 2001.


Look at the bottom line, the VCs say.

Last year was the worst in more than three decades for venture capital investing as the slowed-down economy forced venture firms to pull back from new deals in favor of protecting their existing portfolios and waiting for a better environment to spend some of the large funds they amassed during the dot-com heyday.

For the 12 months ended last Sept. 30, the average venture fund was off by a third from the previous year, according to research firm Venture Economics and the National Venture Capital Association. That is the biggest drop since at least 1969, when Venture Economics began keeping records.

And the numbers might not improve for a while, according to several Southeastern venture capitalists, who cite continuing economic doldrums, the need to write off bad investments and a lack of exciting new ideas.

As long as the stock market remains on unsure footing, opportunities are scarce for venture firms to exit their portfolio companies through an initial public offering or corporate merger or acquisition. That is a primary reason for the huge negative returns on venture funds: Venture Economics data show venture firms returned just $1.1 billion of cash and stock to investors in the third quarter of last year, compared with a record $19 billion in the first quarter of 2000.

“The lack of liquidity is a major concern,” says Richard Maclean of Charlotte-based Frontier Capital. “M&A has been in such a funk that we’re having to hold on to companies much longer than expected.”

Portfolios still overvalued

Some of those venture holdings are at values set during the boom years of 1998-2000 that are not realistic in today’s market. Stakes in those companies will have to be written down as they either shut down or raise money at new, lower values, which will hurt venture returns even more. The average value of a venture-backed company fell 45 percent between the end of 2000 and last September, according to Venture Economics.

“We haven’t seen the end of the write-downs,” says Mitch Mumma of Durham-based Intersouth Partners, who notes that many VCs spent last year determining which companies in their portfolios they could afford to continue supporting. “Returns will continue to suffer in the short term.”

The venture firms say their investors understand the fluctuations in the market and aren’t concerned by last year’s numbers. Many sign 10-year funding commitments with the firms and would rather wait out the downturn for better opportunities than see good money chasing bad, according to the VCs.

That’s not universally true. A few California-based venture funds have started giving money back or are cutting their management fees because they have so much available funds that they can’t invest it all within a reasonable time frame.

Institutional investors like Duke University and the University of North Carolina won’t talk about the recent performance of their venture portfolios. State treasury officials for North Carolina and Georgia say they don’t have enough exposure to the venture markets to warrant comment.

Few ‘compelling ideas’

Having patient investors is allowing Southeastern VCs to sit on piles of cash.

After getting burned so badly by dot-bombs and by overvaluing many remaining companies, venture firms are more finicky about the types of businesses to which they will commit money. Gone are the days when a concept alone would get easy money. Now, VCs want to see proprietary technology, successful test results and even paying customers before they cut a check.

Alan Taetle of Atlanta-based Noro-Moseley Partners says he spends just one day a week prospecting for new deals even though his firm has some $200 million in hand.

“There just aren’t a lot of compelling ideas out there that meet our standards,” he says of Noro-Moseley’s requirement that start-ups seeking funding should have between $1 million and $5 million in revenue.

Still, Taetle and other VCs would love to find some quality deals so they can put last year behind them and work on pumping up their future returns.

“You have to be an optimist in this business,” adds Steve Nelson of Charlotte-based Wakefield Group. “I think there are plenty of opportunities in our market, and I think good companies will have plenty of opportunities to get the funding they need.”

For an updated list of the latest VC deals in the Carolinas and Georgia, click here: