Banking & Capital Markets

Corporate Venture Capital in Decline

As losses mount, companies abandon their in-house venture arms. Also: Bulls butt heads with bears, and Americans don't know bonds.
Joseph McCaffertyNovember 26, 2001

More and more companies are deciding to leave venture capital to the professional VC firms. After racking up billions in losses this year, corporate venture arms are shuttering their doors at roughly 1 in 10 companies that have them.

According to the National Venture Capital Association, overall venture investments totaled $23.4 billion for the first half of this year, down 57 percent from the same period in 2000. Corporate-backed venture capital declined even more during the period, down 65 percent to $3.1 billion.

The economic downturn has shown many companies just how risky their VC units truly are. Some have huge losses in their own operations, and bad investments make the situation even worse. Year-end audits are likely to turn up more poor investments, which could lead companies to take write-offs.

In August, Compaq Computer Corp. shut down its corporate development team, which handled the company’s venture investments. In September, Commerce One Inc. folded its VC unit into a corporate development unit.

Not everyone is abandoning corporate VC efforts, however. Lucent Technologies Inc. — which, say managers, takes a long-term approach to VC investing — expects to continue those efforts through its Lucent Venture Partners unit.

Some companies are even stepping up their VC endeavors. Applied Materials Inc. created a new venture fund last month that will invest in technologies to help manufacture semiconductors and communications components. In October, Nestle Group launched a $121 million VC fund to invest in food and life sciences companies.

A Time for Market Fortune Telling

Along with shopping and eating, a favorite activity of many people this time of the year is predicting what the future holds for the stock market and the economy as a whole. This weekend Treasury secretary Paul O’Neill got into the act when he said that the U.S. economy is heading for a recovery. Encouraged by early holiday shopping results, O’Neill said that he expects the recovery to take place early next year, with continued growth through the rest of 2002.

Meanwhile, the National Bureau of Economic Research is likely to announce Friday that the economy has officially entered into a recession, according to an a report in the Wall Street Journal. According to the Journal, the NBER has scheduled a conference call for Friday, when it will make the announcement.

Most economists define a recession as two straight quarters of economic contraction. However, the NBER uses a more complex definition that requires a significant fall in economic activity across a broad range of sectors that lasts several months.

Despite fears of an official recession, many analysts on Wall Street are predicting that stocks are about to enter a bull market. And by some measures the market already has. The Dow Jones Industrial Average is already up 21 percent from its low of 8,236 on September 21, when massive selling sent many indexes down to three-year lows. The Nasdaq has recovered 36 percent from its low on that day. Many analysts use 20 percent as the rule of thumb to characterize a bull market.

“This is not a time to be bearish,” Stanley Nabi, managing director of Credit Suisse Asset Management, told Reuters news service last week. “If anything the economy has demonstrated [its resiliency] in the last few weeks.” The positive outlook is largely based on improvements in the situation in Afghanistan and the belief that cuts in interest rates by the Federal Reserve are starting to have an impact.

Americans Don’t Know Bonds

A recent survey by American Century Investments, a mutual fund manager, showed that the average investor knows very little about bonds, even though they have outperformed stocks this year.

In a 10-question survey taken by 750 investors, only 27 percent answered at least half of the questions correctly. Only 63 percent could give a simple definition of a bond; just over 50 percent knew that bond prices fall when interest rates rise; 20 percent knew that the lower a bond’s credit rating, the higher the interest it tends to pay to attract investors; and only 13 percent were aware that the longer a bond’s maturity, the more sensitive its price is to changing interest rates.

In Brief

NetScreen Technologies Inc. said on Friday that it plans to offer 8 million shares of stock at $9 to $11 each in an initial public offering. The Sunnyvale, California-based network security systems developer hopes to raise as much as $88 million for general corporate purposes, including the possible funding of acquisitions, according to its filing with the Securities and Exchange Commission. The offering is being underwritten by Goldman Sachs, J.P. Morgan, and UBS Warburg.

Loral Space & Communications announced that its wholly owned subsidiary Loral CyberStar Inc. has begun an exchange of $927 million in debt for new debt and stock warrants. The satellite company hopes to save up to $43 million of interest per year with the swap. Dresdner Kleinwort Wasserstein is arranging the exchange offer.