By Tom Still

MILWAUKEE – Howard Anderson, who teaches courses on early-stage companies at the Massachusetts Institute of Technology, founded or co-founded three venture capital funds. He was a self-described “financial samurai.” Now, he’s hanging up his sword, declining to raise new money for his funds.

“There’s too much venture money pursuing too few deals. There’s nowhere for all that money to go: we can’t spend the money we’ve raised,” Anderson wrote in Technology Review last month. “I’ll miss it. But now the markets are too rational, and the returns are too small and uncertain. So, time to leave.”

If a respected venture capitalist believes it’s time to bid adieu to a business he loved, what are the rest of us to think? Is venture capital dead – or, at least, is it a wounded shell of what it was before the bubble burst in 2000?

Don’t write off the venture capital industry just yet, counters Mark Heeson, president of the National Venture Capital Association. While it doesn’t resemble the unrestrained financial force it was in 1999 and 2000, the post-bubble venture capital industry has changed for the better.

Heeson spoke last week in Milwaukee at the annual meeting of the Mason Wells Biomedical Fund I, a health technology fund that is part of the Mason Wells Private Equity portfolio. Mason Wells is one of four venture capital firms with offices in Wisconsin, the others being Baird Venture Partners, Venture Investors and Frazier Technology Ventures.

On one major point, Heeson and Anderson would agree: Venture capital investing has become much more rational. But that doesn’t mean VC firms will fail to make a significant return on their money, or that entrepreneurs should give up on finding financing for their companies.

The history of venture capital over the past 35 years has been more like the current market than the peak years of 1999, 2000 and 2001, when nearly $100 billion per year was invested by roughly 600 VC firms. The market recoiled in 2002 and through most of 2003, but rebounded in 2004, when about $20 billion was invested. A similar pace is expected in 2005.

“What’s happening today is long-term, reasoned investment,” Heeson said.

Gone are the days when VCs announced they would raise $250 million for a fund but accepted $500 million or more, simply because the money was available. Heeson said venture capitalists are only raising what they need and can reasonably invest – even if limited partners are eager to throw more money at them.

The result is a venture capital industry that is still producing value and jobs at a rate that far outpaces the rest of the economy, Heeson said, but not at the expense of over-extending itself. From 2000 through 2003, for example, venture-backed firms created 6.5 percent more jobs while employment for all U.S. firms decreased by 2.3 percent.

There are challenges to the venture capital industry, however. The current environment for initial public offerings, the first sale of private stock by a company to the public, is can be difficult. The Sarbanes-Oxley Act, signed into law in mid-2002 as a reaction to the Enron scandal, introduced major changes to financial practice and corporate governance regulation for many companies. Some say Sarbanes-Oxley is discouraging new IPOs, a claim supported by the recent run-up in merger and acquisition activity as an alternative.

Also, it has become more difficult for companies with majority venture funding to receive federal Small Business Innovation Research (SBIR) grants, and portfolio disclosure rules in some states are compelling venture firms to decline acceptance of investments from public pension funds.

Heeson says the venture capital industry will adapt to those challenges and continue building the U.S. economy – and expand worldwide. In 2003, venture-backed companies employed more than 10 million American workers and generated $1.8 trillion in sales. And the best may be yet to come, Heeson said. Investments made five years ago, at the peak of the venture boom, are only now starting to create the anticipated value.

“We’re sending the end of one cycle and the beginning of another,” Heeson said. If that’s true, the Howard Andersons of the VC world may someday wish they were still swinging a big sword.

Still is president of the Wisconsin Technology Council. He is the former associate editor of the WisconsinState Journal in Madison.