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Venture capitalists enjoy best year since dot-com bust

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SAN FRANCISCO -- Venture capitalists ended 2004 on their most profitable run since the dot-com bust, continuing a gradual recovery that has coincided with the stock market's renewed interest in young companies.

The one-year return on venture capital funds averaged 19.3 percent during 2004, an improvement from an 11.7 percent gain in 2003, according to statistics released Monday by the National Venture Capital Association and Venture Economics.

Last year's venture capital gains outpaced the stock market's most closely watched bellwethers. For instance, the Standard & Poor's 500 increased 9 percent and the Nasdaq composite index rose 8.6 percent during 2004.

The performance represented the venture capital industry's best one-year showing since 2000 when the average fund generated a 24.7 percent return.

"The sunshine seems to be coming out again," said John Taylor, vice president of research for the National Venture Capital Association.

The brightening outlook is a stark contrast to a few years ago when venture capitalists slogged through losses created by a slew of misguided investments during the late 1990s. Venture capital funds dropped by 29.9 percent in 2001 followed by a 29.1 percent decline in 2002.

That was a punishing comedown from the late 1990s when the unprofitable Internet companies financed by venture capitalists became a hot commodity in the stock market. The boom peaked in 1999 when venture capitalists averaged a one-year return of 174 percent.

Although they are making money again, venture capitalists continue to be haunted by the dot-com downturn. The average fund had decreased by an average of 1.3 percent in the five years ending 2004, a loss caused mostly by the failures that piled up in 2001 and 2002, Taylor said.

Many of the startups that survived the shakeout have matured into successful companies, making it easier to launch an initial public offering of their stock.

Ninety-three companies financed by venture capitalists went public last year, raising $11 billion in the process. The number of venture-backed IPOs completed last year surpassing the volume of the previous two years combined when just 53 venture-backed startups went public, raising $4.5 billion.

IPOs are important to venture capitalists because they provide a way to cash out of their investments and distribute the gains to their investment partners.

More startups are being sold before they make it to the stock market, a phenomenon that's also helping to enrich venture capitalists.

A total of 333 companies funded by venture capitalists were sold last year, up from 291 in 2003, Venture Economics said. The sales price of the 2004 deals averaged $84.5 million, a 35 percent increase $62.8 million from 2003.

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