Even the VCs Are Jittery

Tech stocks tumble, and yes, America's venture capitalist elite worries too. But only in private.
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When tech stocks tumble, Silicon Valley's share-happy elite follow a predictable path. First, with entrepreneurs and individual investors assuming the "bubble" is bursting, venture capitalists panic too. Privately. Then reporters call the VCs, and the VCs smoothly assure the ink- and byte-stained wretches that they're investing for the long term and therefore are completely unperturbed by the carnage.

In reality, the VCs are worried. They just won't dare say so. And why should they? It will take a lot more than a summer pullback from ludicrous valuations to merely silly valuations before the Masters of the Valley truly feel some pain.

"There's an instantaneous deer-in-the-headlight look on Sand Hill Road," explains startup adviser and VC watcher Randy Komisar, referring to the pricey stretch of pavement in Menlo Park, Calif., that is ground zero for tech investing. "And then, when they realize they're not being thrown out of their houses and that their funds are full, they go back to business as usual."

Komisar is a self-described "virtual CEO to the stars" who advised WebTV before

Microsoft

(MSFT) - Get Report

bought it, e-credit card issuer

NextCard

(NXCD)

before it went public and

TiVo

, the much-hyped video-recording-device maker that's currently in registration for its own IPO. He cautions that there will be pain even though he thinks the super-hot economy and the promise of the Internet will keep things rolling. "This doesn't mean that every stupid dot.com trying to do a startup will succeed," he says.

In times like these, industry stalwarts like to trot out the arguments that didn't work the last time stocks tumbled but still sound good. One of Silicon Valley's favorites is "tiering," the notion that the best companies will keep going up after the dust settles while the lesser lights simply will bite the dust. (Note that one's own companies are always "franchise" companies and someone else's investments are the dogs.)

"What's of concern is that even the best companies are getting clipped along with the second- and third-tier companies," says James Breyer of

Accel Partners

in Palo Alto. Accel portfolio companies that have gone public in recent months include

Redback Networks

(RBAK)

,

Portal Software

(PRSF)

,

Northpoint Communications

(NPNT)

,

Mpath Interactive

(MPTH)

and

Quokka Sports

(QKKA:Nasdaq). Though a huge success for the companies that have raised hundreds of millions of dollars combined, the pullback in tech stocks has slapped the Accel portfolio. The average decline of these five stocks from their highs is 46%.

Breyer, who also is president of the

Western Association of Venture Capitalists

trade group, insists the Net-stock correction "will in no way affect our day-to-day investment decision-making process." Accel, he says, will continue to invest in "20 to 25 new Internet companies per year that we believe can become long-term franchise companies."

At least part of the confidence the Net-oriented VCs tend to show is genuine, primarily because they've already been so successful. For example, shares of Accel investment

Real Networks

(RNWK) - Get Report

, at Tuesday's close of 66 1/4, are worth half their 52-week high but still seven times their low.

The other canard for times like this is that with public markets ailing, private-market investments will come more cheaply for VCs and other pre-public investors.

Charles Walker, managing partner of

Hambrecht & Quist's

$330 million private-equity fund,

Access Technology Partners

, has invested just 20% of his available capital since opening the fund in February. "Eighty percent of the fund is available to invest at lower prices," he says. VCs generally acknowledge, however, that private valuations tend to come down more slowly than public prices. It's tougher to convince a pre-public CEO her company's worth less than it is to have public investors do the convincing for a post-IPO executive. To be sure, Walker's fund will be dependent on the health of the public market. Six of its investments are in registration to go public, he says.

Over and over, VCs say they won't change their behavior if public markets stay down. "In good times and bad, our mantra is, 'You've just got to keep focusing on doing the right stuff,'" says Peter Mills, the Menlo Park-based partner with

@Ventures

, the VC arm of red-hot Net investor

CMGI

(CMGI)

. "The exit strategy" -- that's VC talk for going public or selling the company -- "will take care of itself."

But then there are those with memories, like Cliff Higgerson of Palo Alto's

Communications Ventures

. Higgerson has been making venture investments since 1974, and recalls the VC-industry bust from the mid-1980s to the early 1990s. Among the causes: too much supply of venture-backed companies and a decline in the overall market, especially after 1987.

Higgerson largely has focused on non-Internet investments. Among his biggest successes was an early stake in

Ciena

(CIEN) - Get Report

that turned a $2.4-million investment into $430 million for his limited partners. But he's also taking stakes in Net companies like

Digital Island

(ISLD)

(an investment from his previous firm, Vanguard Venture Partners) and still private

documentdelivery.com

.

"We've invested on the assumption that there's a long-term viable business model," says Higgerson.

But of course.

Quote of the week:

"There's no way 8 million people are right about anything," says a trader with a fundamental approach, speaking of daytraders who practice technical analysis.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a monthly column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.