Replies to post #3576 on Wave Systems Corp. (fka WAVXQ)

[yayapapadoc]

What SKS had to go thru in 1st Q (Yuk):
http://www.washingtonpost.com/wp-dyn/articles/A16900-2003Aug3.html

D.C. Area Venture Funding Lags Behind Nation
Small Companies Are Paying a High Price for Capital as Investment Firms Increasingly Hold the Upper Hand

By Charles Duhigg
Washington Post Staff Writer
Monday, August 4, 2003; Page E01


When InPhonic Inc., a wireless software company founded in Washington in 1999, needed to find $10 million to $15 million earlier this year, they started thinking about a loan.

But then chief executive David A. Steinberg met partners from the venture capital firm Technology Crossover Ventures, and he decided he preferred an investment from TCV. The Palo Alto, Calif., investing giant had helped such companies as Expedia Inc. and Netflix Inc., and working with them "would be awesome," Steinberg said. "These guys can make companies happen."

Membership in TCV's club, though, came at a price. Jay Hoag, a principal at TCV, wanted to invest at least $56 million.

"When Jay let me know how much money he needed to put in to make it worth their while, I almost choked," Steinberg said. The terms were agreeable, but "it took a long time to convince the board to allow this," Steinberg said. Because InPhonic has recently filed to publicly sell stock, Steinberg could not reveal how much of the company TCV received, but it is speculated to be about 20 percent.

Similarly, when Jill Stelfox started looking for money for Defywire Inc., the Herndon software company she co-founded in 2002, she had meetings with 25 to 30 venture capital firms, raising $4.5 million. But she had to hand over more than 50 percent of the company's stock. Stelfox said she has been pleased with her relationship with the funders.

During the late 1990s, the normal way of doing business was reversed; venture capital firms competed to fund new companies. Entrepreneurs could pick and choose among them. But today's dire economic conditions have changed the balance of power. Now, venture capitalists are firmly back in control -- forcing companies to compete over them, rather than vice versa -- and investment activity over the past few quarters indicates that will not change soon.

Despite the rediscovered power of venture capitalists, analysts anticipate that many venture firms will shrink or shut down in the next few years, undone by low returns and investor ire.

These trends are apparent in the Washington region, where venture capital investment has fallen every quarter since mid-2000. Last week's MoneyTree survey of 2003's second-quarter venture capital activity revealed that while national investments increased for the first time in two years, the number of investments in the Washington region declined by 23 percent from the previous quarter. Locally, the average investment was $4 million, substantially lower than the national average of $6.4 million.

In individual sectors within the technology field, the news is even more grim. Investment in telecommunications led the region. But when InPhonic -- which had second-largest investment in the nation last quarter -- is excluded, local telecom investing declined by 76 percent over the previous three months. Investment in software firms was the national leader, growing 7 percent from April through June. But in the Washington region, software investments fell by 14 percent last quarter. The one piece of bright news is that nearly half of all second-quarter investments locally were to early-stage or start-up companies, suggesting growth on the horizon.

The news means tough times for entrepreneurs.

"Most of the guys I know are having major problems finding capital," Steinberg said. "And the ones who do [get funding] find that valuations have been pushed way down."

It has become a buyer's market, say venture capitalists. "The frenzy to do deals from a few years ago is gone," said Don Rainey with Intersouth Partners, one of the investors in Defywire. "People can sit on a deal forever now."

If the news bodes poorly for entrepreneurs, it is equally worrisome for venture capitalists. In spite of their renewed authority, many funds forecast that the number of firms will significantly contract in the coming five years.

"The strong are getting stronger and this is the beginning of the end for weaker firms," said Jonathan M. Silver, a managing director at District-based Core Capital. "When the dust settles, we'll see that 40 to 50 percent of the VC funds in the country have disappeared."

D.C. Area Venture Funding Lags Behind Nation








Defywire founder Jill Stelfox says she is pleased with her funders, even though she had to relinquish majority control. At right is Chuck Gautney, chief technology officer and vice president of product development. (Stephanie K. Kuykendal For The Washington Post)



_____Chart_____

• Second-Quarter Venture Capital Investments: Mid-Atlantic Region



_____Venture Capital News_____

• Venture Capital Rebounds in U.S. but Falls in Region (The Washington Post, Jul 29, 2003)
• Venture Losses Continue for 9th Quarter (Associated Press, Jul 23, 2003)
• New Investors Signed Up For TV One (The Washington Post, Jul 22, 2003)
• Lumenos Opens Fourth Round of Fundraising (The Washington Post, Jul 18, 2003)
• Matrics Secures Venture Financing (The Washington Post, Jul 15, 2003)
• Venture Capital Section





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Silver and others said that VC firms are dissolving as investors object to losses from bad investments and demand the return of uninvested funds.

The trend affects firms both large and small. In 2002, Mohr, Davidow Ventures, which has an office in Tysons Corner, said it would downsize its seventh fund by $170 million, returning 20 percent of the fund to investors. Investors began pressuring other funds to follow suit, and by the end of the year, venture firms had returned $5.6 billion to investors.

The funds that will survive in this new market, said Silver and others, are those that have managed their size wisely and kept up returns.

"The days of the mega-multibillion-dollar fund is over," Silver said. "Investors have concluded that beyond a certain size, it's just too difficult to put capital to work."

As funds increase in size, the attentions of venture capitalists become distracted by the pressure to find significantly more investment opportunities, Silver said, and returns suffer.

Additionally, as firms grow, the incentives change, worrying investors. Many firms take, as a fee, 2 percent of the funds under management and 20 percent of the fund's return after the investments show a profit. By limiting the fee and tying most compensation to the fund's performance, the thinking goes, venture capitalists have an incentive to seek out excellent investments.

But for firms that raise multiple large funds, fees alone can become significant. Texas-based Austin Ventures LP, for instance, manages $2.4 billion. The fund will not reveal what fees it collects, but if it charges a standard 2 percent, the fees are $48 million per year, or $2.8 million for every investment professional employed by the firm. The firm has 60 employees.

Austin Ventures, and other large venture capital firms, did not return calls to answer questions regarding their fees.

"When funds were $200 [million] or $300 million, the management fee probably just paid for a VC's rent, travel and maybe a small salary," said Erik Gordon, a professor at the University of Florida's Warrington College of Business and an expert on venture capital. "Now, though, venture capitalists can get rich just by sitting around. That worries investors."

But venture capitalists argue the fees are needed.

"There are expenses," explained Jim Barrett of Baltimore-based New Enterprise Associates. "We have analysts, a treasury function, due diligence consultation, patent research -- those things are expensive." NEA differs significantly from industry norms by asking a committee of investors to approve yearly expense budgets. NEA manages $5 billion, and collects the equivalent of 0.8 percent to 0.9 percent of managed capital in fees.

Another issue worrying investors is the poor performance of many funds. A recent survey by Thomson Venture Economics and the National Venture Capital Association shows the average venture capital fund suffered losses of 20 percent or more per year in the past two years.

The funds that will survive, say venture professionals, are those that have managed to show positive returns during the recent downturn.

"There's going to be a flight to quality," Silver said. "You can see it starting right now."

Ultimately, local conditions for venture investing and entrepreneurs may not signal doom, but simply a return to historical norms.

The average valuation of a company receiving venture funding in 2002, according to research firm VentureOne, was $10.5 million, down from a high of $24.5 million in 2000, but close to the average for 1994 through 1997. And although fundraising by venture capitalists in 2002 stood at only $11.9 billion, down from $87 billion in 2000, it was still higher than any year before 1996.

"Venture capital is not fast money, regardless of what happened in 2000," said Hoag of TCV. "It's a long-term investment. And this downturn is healthy -- there needs to be an equilibrium between supply and demand of capital for deals to be done efficiently."

[hifi_nut]

I received an interesting call from my broker this morning.......

it seems someone is looking for shares to short and are willing to pay interest to ME, and not just to the brokerage, if I let them set up a custodial account with my shares. These would be shares in my IRA as well as my regular account. I asked for more detail and will report on this more later.

So if shares are hard to find to sell short, what happens after the next big announcement????

HiFi

[SPIN]

OT 2b re: newbies

much closer!

i'd put a headline in all caps (e.g., WAVX DD RESOURCES)

and then put the link in the message text (so it gets blue-lighted).

when the url is in the headline, the impulse types still hafta cut&paste (probably a challenge for some of that crowd ;-)

that said, i think you & awk are doing a valuable service to let the public know what this company & its prospects are all about. some of those momos & daytraders might just hold back a few shares once they realize what they own.

hell, maybe some of 'em'll put some shares in a Roth IRA!

anyway, good work!

SPIN

PS Hey ALLSHORE!!!!! DROP THE ALL CAPS!!!! OKAY!?!?!?