E-Commerce Taking Less of More VC

Funding for e-commerce sites declined amid an overall increase in venture capital funding for the quarter ended June 30th, according to a PricewaterhouseCoopers Money Tree survey released Monday.

Investment in both business-to-business (B2B) and business-to-consumer (B2C) e-commerce sites suffered a drop in both raw venture capital dollars (US$) invested and percentage of total Internet investment.

“The Internet is still the driver, but the investment mix within the category has shifted dramatically,” PWC managing partner Tracy T. Lefteroff said.

River of Dollars Shifts Direction

B2B Web sites received $1.58 billion in second quarter 2000 venture capital investment, or 13.6 percent of total Internet investment. In the previous quarter, B2B drew $1.891 billion, or 17.4 percent of venture capital Internet investment.

B2C sites took in $1.36 billion in the past quarter, a slight drop from the $1.47 billion received in quarter one. The percentage of venture capital Internet investment in B2B dropped from 13.5 percent to 11.6 percent.

Kirk Walden, national director of the Austin, Texas-based Money Tree survey, told the E-Commerce Times that though there is a relatively downward trend in e-commerce investment, the total number of dollars invested should be kept in perspective.

“I wouldn’t overstate that it’s bad news,” Walden said. “Let’s face it folks: three billion dollars is a lot of money.”

Strong Upswing from 1999

The e-commerce sites in question definitely show a dramatic increase when compared to the second quarter in 1999. B2B sites at the same time last year drew $352 million, meaning that venture capital investment in that sector has more than quadrupled. Venture capitalists invested $760 million in B2C sites in quarter two 1999, barely half of this year’s second-quarter total.

However, at this time a year ago, B2C encompassed 19.6 percent of venture capital investment in the Internet. That percentage was almost cut in half this time around, to 11.6 percent.

“Investments are concentrating on the business of the Internet itself, not the latest collection of hot sites,” Lefteroff said. “E-commerce sites, both B2C and B2B, are down in dollars and in percentage share. The focus is on overall infrastructure, especially in the Tools-Applications segment.”

Internet Surges in Other Areas

Service companies, including content developers and order fulfillment companies, took in the largest share of Internet investment in Q2 2000 with $2.99 billion. Tools and application companies, such as Web site security and traffic management problem-solvers, were next at $2.85 billion. Access and infrastructure companies, such as Internet Service Providers, drew $1.87 billion.

All of the above categories showed increases from the previous quarter ranging from 11 to 35 percent.

“We would expect for the immediate future for the other side of the Internet to garner larger shares of investment,” Walden said.

Two other studies released earlier this month back up the findings of the Money Tree report. The National Venture Capital Association and Venture Economics determined that e-commerce took in 14.5 percent of venture capital investment in the second quarter, a decline from 27.2 percent in the first quarter.

Research and consulting firm VentureOne found that e-commerce companies got 32 percent less VC money in the second quarter than in the first.

What Comes Next, B2A?

One revelation of the latest survey highlighted the continuing trend of dollars moving from B2C companies to B2B companies. A year ago, B2C was backed by twice as many venture capital dollars as B2B. In the latest quarter, B2B had a 30 percent more dollars than B2C.

According to Walden, B2B surpassed B2C in venture capital investment for the first time in the first quarter of 2000. He found the decline in B2B investment to be somewhat surprising.

“I think [the relative decline in B2C investment] is not so unexpected because we began to see signs of its lessening importance in the first quarter (2000),” Walden said.

Walden added that B2C requires more capital to fund marketing efforts needed to generate sufficient site traffic. B2B “requires less cash because the marketing effort can be considerably more focused,” he said.

VC Picture Glows

Overall, venture capital investments in the second quarter just ended reached an all-time high of $19.58 billion, surpassing the previous record of $17.14 billion from quarter one. The total was 256 percent higher than the $7.65 billion in Q2 1999.

“Investments in the first half of 2000 totaled $36.7 billion,” Lefteroff said. “That’s already more than the $35.6 billion invested in all of 1999.”

Technology-based companies, including Internet-related businesses, accounted for 95 percent of all venture capital investments in the quarter.