The top 25 VC firms reflect the new sector trends. Five specialize in biotech, including the venture arm of Novartis. Two of the top three, Global Crossing Ventures and the Williams Communications Group, are the investment vehicles of networking infrastructure companies.

This article is from the June 15, 2001, issue of Red Herring magazine.

Early last year a Red Herring cover story described how venture capitalists had become the general public's new cultural heroes (see "Who wants to be a venture capitalist?" May 2000). Everybody and their dentist's receptionist, it seemed, thought they could get rich by investing in private companies. Unfortunately, the issue hit the stands in early April, shortly after the market nose-dived and the VC business returned to its essence: high-risk investment best practiced by professionals.

Although the IPO window may have slammed shut, all is not lost. As long as you aren't trying to start a new business-to-consumer company, VC money is still flowing liberally. According to Thomson Financial Venture Economics, 2000's total VC investments rose 57 percent, to $92.3 billion. Thanks in part to tenacious first- and second-quarter euphoria, investment in Internet-related companies rose 92 percent from the previous year, according to PricewaterhouseCoopers and VentureOne. After the first quarter, however, Internet investment sank steadily. E-commerce investments in particular suffered, plummeting 92 percent, ending at just 1 percent of Internet investment in the fourth quarter. But while the storefronts suffered, the back end benefited: infrastructure investments, including communications and networking equipment, rose over the year.

More notably, biotech, high tech's stepchild, made a big comeback. Investment in biopharmaceutical companies rose an impressive 86 percent, raking in $761.9 million in the fourth quarter alone. According to a research report by biotech specialists Burrill & Company, No. 12 on our list, 2000 saw 67 biotech IPOs, the most ever in the industry's 25-year history, and venture investment in biotech more than doubled for 2000, topping $2.8 billion.

The top 25 VC firms reflect the new sector trends. Five specialize in biotech, including the venture arm of Novartis (NYSE: NVS), one of the world's largest life sciences companies. Two of the top three, Global Crossing Ventures and the Williams Communications Group (NYSE: WCG), are the investment vehicles of networking infrastructure companies.

To determine the standings, Thomson Financial Venture Economics ranked the firms based on their "equi-return," or market cap-weighted average of the year-end returns on $1,000 invested in each 2000 portfolio IPO at its offering price. We included only firms with three or more IPOs of at least $15 million, and excluded by necessity American depositary receipts, secondary offerings, and merger-and-acquisition exits.

Of course, most of the spectacular post-IPO performance in 2000 was downward. In last year's top 25 list, the top three firms owed their rankings to the 900 percent increase in Juniper Networks's (Nasdaq: JNPR) market cap. This year, the market cap of the top-ranking IPO, Embarcadero Technologies (Nasdaq: EMBT), rose less than half as much. And a more typical story in 2000 was that of Versata (Nasdaq: VATA) and AsiaInfo Holdings (Nasdaq: ASIA). Stock for both priced at a respectable $24 a share and closed at more than $90 on their first day of trading -- but finished the year below $10. That explains in part why the top seven VC firms on this year's list had only three IPOs each -- the more portfolio IPOs a firm had in 2000, the better the chance that one of them would bomb, ruining its equi-return average.

It's a tougher time to be a VC, but most of the VCs we talked to for this article claimed to be optimistic about the future of technology investing. Several of them pointed out that although the bear market has arrived, valuations are still higher than before the bull market began. The Internet remains a good investment for the long term, they say, especially in the facilitating sectors like broadband networking, wireless services, and semiconductors. Now that the human genome has been mapped, there is also a great deal of quiet enthusiasm for biotechnology, especially new drug-delivery techniques and disease-targeting technologies. Having bid farewell to 1,000 percent returns, the VC industry seems to have regained its senses -- for now.

Kate McKinley is a motorcycle-riding writer and editor in Oakland, California. Write to letters@redherring.com.

THE FEWER, THE BETTERThe top 25 VC firms, ranked by the average equi-return performance of their IPOs in 2000. FIRMNUMBER OF IPOsIPO TOTAL(IN MILLIONS)AVERAGE INCREASE*1. Global Crossing Ventures 3 $407.0 90.0% 2. VP Private Equity 3 $417.0 69.3% 3. Williams Communications Group 3 $210.0 63.6% 4. Summit Partners 3 $130.0 60.9% 5. Needham & Company 3 $117.6 51.7% 6. Fidelity Venture Associates 3 $396.5 50.3% 7. Attractor Investment Management 3 $176.0 46.5% 8. Jafco Ventures 5 $463.5 40.1% 9. Sanderling Ventures 4 $249.5 35.7% 10. Vulcan Ventures 6 $703.7 28.3% 11. Charles River Ventures 8 $606.0 27.5% 12. Burrill & Company 3 $272.0 23.2% 13. Sutter Hill Ventures 5 $419.8 22.6% 14. Compaq Computer 3 $363.0 20.6% 15. Novartis 3 $436.8 18.4% 16. Ampersand Ventures 4 $432.7 17.3% 17. Atlas Venture 5 $544.1 16.7% 18. Oxford Bioscience Partners 4 $271.3 16.7% 19. Canaan Partners 9 $752.5 15.2% 20. Battery Ventures 5 $330.5 14.4% 21. E.M. Warburg, Pincus 8 $546.0 13.8% 22. Mayfield 8 $782.9 13.4% 23. Frazier & Company 3 $169.8 11.9% 24. Matrix Partners 4 $522.0 11.7% 25. Domain Associates 5 $305.9 10.0% * Based on a $1,000 initial investment of IPO price and using market cap-weighted average.Includes only firms with three or more IPOs of at least $15 million. Excludes ADRs, secondary offerings, and M&A exits. 0 Going public: IPO review for 2000

The top 25 VC firms of 2000