Venture Capitalists Lose Focus with Internet Companies
Table 22.2 shows that there was a tremendous surge in funds available for venture capitalists in the last half of the 1990s. Much of the investing focus was on the financing of dot com companies. There are two serious ramifications that result. First, it is likely that there are only a certain number of worthy projects to finance at any one time. When too much money is chasing too few deals, firms are going to obtain financing that would be rejected at other times. As result, the average quality of venture fund portfolios falls. A second problem caused by the surge of money into venture funds is that the ability of the partners to provide quality monitoring is reduced. Consider the case of Web van, an Internet grocer that received more than $1 billion in venture financing. Even though it was backed by a group of experienced financiers, including Goldman Sachs and Sequoia Capital, its business plan was fundamentally flawed. In its short life, Web van spent more than $1 billion building automated warehouses and pricey tech gear. This high overhead made it impossible to compete in the grocery business, where average margins are about 1%. Had the investment bankers been actively monitoring the activities of Web van, they might have balked at developing an infrastructure that required 4,000 orders per day per warehouse just to break even. Not surprisingly, Webvan declared bankruptcy in July 2001.