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Venture Cap hurting from dot.com fears

Wednesday, August 15 12:18:57

As consumer Internet shares plummet, venture capital firms find themselves fending off increasingly uneasy investors who are urging them to cash out after millions -- and in some cases, billions -- of dollars evaporate from holdings.

Rapid declines in once-hot names ranging from Facebook and Groupon to Pandora and Zynga are putting some strain on VCs' relationships with their own investors, who do not often pick up the phone and weigh in with their opinions. Now, the calls they do get tend to focus on that group of high-profile companies, investors and VCs say.

On Tuesday, many again got walloped. Daily-deals site Groupon lost a quarter of its value after posting dismal results, bringing its total loss in market value since November to more than 70 percent, or $9 billion. Social network Facebook shed 6 percent and is now about half its value at debut.

At a company's initial public offering and then again about six months afterward, venture backers are free to sell or distribute shares to their own investors, known as limited partners. But many hold on for months or sometimes years, leaving millions on the table when compared to the companies' rich prices at IPO.

"We don't pay you to hold on to a public stock," said Chris Douvos, managing director of fund-of-funds service Venture Investment Associates and a former manager at Princeton University's endowment.

The situation reminds him and others of the 2000 bursting of the dotcom bubble, when limited partners' paper profits in companies that were long on buzz and short on business models dissipated at a rapid clip -- memories that could encourage limited partners to do some lobbying.

For endowments that spend based on the value of their portfolios, "you've spent paper profits, which have now disappeared," Douvos said. Still, the impact is usually just a fraction of a percent of the endowment.

Venture capital funds invest in stages over many years, so it's difficult to estimate changes in the value of their holdings. Many likely made big profits on the dotcoms given the low prices they invested in initially, but the recent selloffs are compressing those returns.

As of Tuesday's close, Kleiner Perkins Caufield and Byers has seen its investment in gaming-company Zynga dwindle by $450 million since its IPO.

Accel Partners, which won acclaim for being among the first to back Facebook, has nonetheless lost more than $2 billion on paper in three months.

Greylock Partners still holds 9.6 million shares in music-service Pandora; NEA holds 87.5 million shares in Groupon; Kleiner retains all its 65.2 million shares in Zynga; and Accel owns 152.3 million Facebook shares, filings show.

Greylock, NEA and Kleiner declined to comment on specific holdings. Accel didn't respond to a request for comment. (C ) Reuters