Internet VC Funding Brisk in Q1

Despite a precipitous decline in shareholder confidence in the Internet sector, the National Venture Capital Association (NVCA) says that a record $22.7 billion (US$) was invested in start-ups during the first quarter of 2000, a 266 percent increase over 1999 totals.

The number of companies receiving funding also rose, with 1,557 benefiting from venture capital in the first quarter, up from 851 in the 1999 quarter.

Steve Lazarus, managing partner of Arch Venture Partners and chairman of NVCA’s research committee, said the average investment is rising because companies have to move faster to grab market share.

The Internet has also made target markets bigger by breaking down regional boundaries, Lazarus said. “Today’s young companies must also establish global leadership in their early stages of development, which requires significant infrastructure investment,” he added.

Early-Stage Firms Get More

The first quarter statistics show that venture capitalists are indeed focusing on companies in the early stages of growth. Some 85.2 percent of all venture capital investments went to these companies last quarter, up from 64.8 percent in the first quarter of 1999.

Computer-related businesses topped the list of venture capital investment in the first quarter, receiving $12.43 billion, or an average of $14.47 million per company.

Within that sector, business-to-business (B2B) Internet companies attracted the most investment, garnering $4.72 billion, or 27.67 percent of all Internet-related VC funding. That figure is up from $647.9 million, or 19.96 percent, in the same quarter last year.

The new totals mark a shift from last year. In 1999, investors poured $4.457 billion into B2C sites in 1999, making up 22 percent of the Internet-related funding pie, according to PricewaterhouseCoopers, while B2B ventures got $2.642 billion, or only 13 percent of the total.

Selective Investing

Anecdotal evidence suggests that investors are becoming more selective when it comes to e-commerce companies, particularly on the consumer side.

“The capital has dried up unless you have a pretty fundamentally compelling business plan,” Tracy T. Lefteroff, managing partner for private equity and venture capital at PricewaterhouseCoopers, told the E-Commerce Times. “Most venture capitalists realize it really does take a tremendous amount of money to build a brand,” he said.

Competition from traditional retailers has been “a lot tougher” than most Internet companies expected, Lefteroff said, but he added that some big retailers have “done extremely well as pure Internet plays.”

Where Does the Money Go?

Staffing is by far the biggest expense for new companies, according to executives at VC-backed firms, who say they have to hire more employees if they want to grow rapidly to build their sites and gain market share.

The stepped-up hiring leads to more spending, as larger quarters and other accommodations are needed. Advertising and marketing are also major expenses for some firms, particularly those that focus on the consumer sector.