VCs: Bold backers to hand-wringers in no time flat

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I love covering b-to-b venture capital. And as with most anything that’s good, it’s because of the people.

Most top VC sources are smart, know just about everyone and are loose with good scoops—qualities any reporter appreciates. As so many venture capitalists worked their way up through top investment banks—no places for the petunia-hearted—I thought they were hardened, ready for bad times as well as good. They’d been schooled under the best financiers, so I thought they had the foresight to make good b-to-b start-up picks and the courage to stick with them.

I was wrong.

The last few months have seen a retreat among VCs that would make Napoleon blush. American VC firms invested $19.6 billion in last year’s fourth quarter, down 31% from the previous quarter’s $28.3 billion, according to the National Venture Capital Association. Investments were down in companies across all sectors, from start-ups to those in the buyout stage.

Although the $103 billion invested in 2000 is a good deal higher than the $59.4 billion invested in 1999, the new downward trend is alarming. It also reveals the weak underbellies of VCs and their reluctance to finish what they started.

Indeed, many b-to-b start-ups have perished recently, some before they had a real chance to make a go of it. Their VC bankrollers, who only months before plied them with seed millions and "atta boys," were suddenly AWOL. Often, this was because the VCs were acting more on their newfound fears than with the convictions that had led them to invest in the companies in the first place. It’s a sorry way to do business.

In the meantime, some VCs are saying they are going to spend more time advising their current portfolio companies on marketing and "realigning" (read: layoffs), instead of plowing more money into them. It’s more a threat than a promise.

VCs’ advice, especially with regard to marketing, has often been amateurish. Mainly, they’ve underestimated the time and money it takes to build a brand on the Internet. They should stick to what they do best: investing and working their Rolodexes on behalf of their portfolio companies.

Meanwhile, b-to-b entrepreneurs who should be figuring out how to become the U.S. Steel of, say, e-mail marketing, are instead spending all their time scrambling for change. Not that hunting for money is necessarily a bad thing. Andrew Carnegie spent his early years doing just that. But the VCs who are wringing their hands on the sidelines aren’t making entrepreneurs’ jobs any easier.

Philip B. Clark is a New York-based senior reporter for BtoB. You can reach him at [email protected]

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