Study: Venture Investing Falls to 1998 Levels

Venture funding dropped 11 percent last quarter to US$5.7 billion, a level not seen since late 1998, as venture capitalists continued to nurse their wounds and stayed on the sidelines in large numbers, according to a new survey.

A total of 819 companies received funding, slightly down from the 826 funded in the first quarter, according to the survey, which is conducted quarterly by consulting firm PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association (NVCA).

After the 11 percent drop, funding now stands at less than 20 percent of its peak level in the first quarter of 2000. During that quarter, $29.5 billion was invested in startups and growing companies. Meanwhile, the average venture round has been cut nearly in half from that peak, to $7 million from more than $13 million.

Fourth Best Year

Despite the precipitous drop-off, the figures seem to indicate that 2002 will come in as the fourth best year in the history of the venture capital industry, trailing only the three years of the dot-com boom from 1998 to 2000.

“This is a cyclical industry that will have its shares of ups and downs,” NVCA president Mark Heesen told the E-Commerce Times. “The important thing is that funding continues to flow to good companies. Everyone recognizes this is a time period that’s going to require more patience.”

Industry Shift

Technology continues to lose favor with investors. The software industry attracted about $1 billion in investment, making it the largest single sector in terms of investment dollars, but it still suffered a 16 percent drop from the first quarter. The bulk of VC cash went to business applications firms.

Investments in semiconductor firms dropped 31 percent, media and entertainment firms saw a 47 percent drop, and retailing and distribution firms saw a 12 percent drop in cash payouts.

New telecommunications ventures endured a 16 percent drop in funding, no surprise given the bankruptcies and scandals at the large telecom firms that are potential customers for a startup’s technology.

But there was some good tech news, too: IT services and computers and peripherals saw funding gains of 45 percent and 16 percent, respectively.

Biotech Bubble

Meanwhile, the number of biotechnology companies taking in venture capital continues to climb, growing to nearly 30 percent of the total VC pie. The same life sciences firms took in less than 7 percent of all funding during the peak months of 2000, when technology investing was all the rage.

“There’s very much been a change in the mix,” PwC global managing partner Tracy Lefteroff said in a conference call.

Meanwhile, Lefteroff said, the numbers seem to indicate that venture firms remain ready to fund startups. If anything, the Nasdaq’s recent beating discourages entrepreneurs more than venture capitalists.

And older companies are more in favor, with so-called expansion-stage firms receiving 66 percent of all dollars invested while early-stage companies take home just 19 percent.

“There’s still a lot of money in the pipeline,” Lefteroff said. “A lot of firms have kept their powder dry, and they’re going to use it at some point in the future.”