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Catching the venture capital craze

What is happening now in venture capital is a phenomenon. I find myself using adjectives such as "explosive" to describe the current trends in this space.

Every quarter's a record quarter in the Internet market, and funding is over the top. Venture capitalists keep pushing the envelope with new projects and concepts, and cash is flowing freely. So what else is new?

When analysts like myself call business reporters to give them the lowdown on the state of venture capital, they ask us to call back when we have "new news," implying that no one wants to hear the same thing repeated every three months.

But this is not the same old, same old. These are amazing numbers. To wit:

• This past quarter, venture-backed companies raised $8.6 billion. Sure, it was only a 5 percent increase over record second-quarter numbers, but the total was a third more than was raised during a record-breaking third quarter a year ago.

• Perhaps even more remarkably, venture capitalists raised $18.1 billion in new funds through the first three quarters of 1999. This is significantly more than the $15.7 billion raised in all of 1998, and more than double the $7.7 billion of 1996.

What is happening now in venture capital is not a story; it is a phenomenon. I am a researcher, a statistician trained to speak in terms of standard deviations. Yet I now find myself using adjectives such as "explosive" and "meteoric" to describe the current trend in venture capital.

And this trend is not limited to Silicon Valley. True, the tech region is still the hotbed for start-ups, but venture capital wouldn't be this big if it were confined to the firms found along Sand Hill Road. VentureOne's tracking of "Bay Area" venture investment has expanded to the entire region to include start-ups located in the East Bay, Marin and even in Sonoma and Monterey counties.

But while the Bay Area accounts for more than a third of venture capital investments nationwide, its expansion is no longer the only driver of growth in the industry. The big story is that significant venture capital activity outside the Bay Area is no longer an anomaly. Driven by lucrative liquidity opportunities and successful returns to investors, the concept has taken root in a number of other areas and is now beginning to bear substantial fruit.

Southern California companies now attract over $700 million in venture financing per quarter. Boston and the Potomac area (Washington D.C., Maryland and Northern Virginia) account for about $500 million a quarter each, and that number is growing. Winning track records in New York City, Research Triangle, North Carolina and Austin, Texas, are spawning local investors who focus primarily on their home regions. And so far, these investors are having no trouble raising new, larger funds.

Investors in these growth areas are not simply replicating the Bay Area model. In the Bay Area this past quarter, 69 percent of all dollars raised were for Internet companies, but in Southern California's so-called Digital Coast, deals concentrated on both online services and biotechnology.

Boston is focused on software companies, while New York City concentrates its frenetic energy on Web services. The Potomac Region is spawning new wireless and connectivity products companies, and Austin investors have been keen on companies producing new software development tools. Investors in North Carolina firms have a balanced portfolio of physician practice management, biotechnology and software companies.

Regions differentiate themselves in sources of funding, as well. Some start-ups are more dependent on local angle investors, while other regional investors have cultivated relationships with universities and local high-tech public companies that are interested in incubating start-ups and creating spin-offs.

Lest we appear isolationist, it's important to emphasize that regional "bubbles" are not confined to this country. Investment in Israeli companies is now approaching $200 million a quarter, putting it just ahead of Research Triangle. Interestingly, Israeli venture focus is not on Internet, but instead on communications and networking companies, as well as biopharmaceuticals. There is nascent activity in Scandinavia, continental Europe and Great Britain as well, and investors are renewing talks of venture capital investment in Asia.

Many would agree with me that venture capital investment is not the sole property of Silicon Valley or the Bay Area, but they often characterize other regional activity as "overflow" or "me too" versions of the Valley model. My opinion is that venture capital activity is a phenomenon that is now manifesting itself in varied ways across the country and the world, and that it will adapt and grow according to the special characteristics of each location. Won't that be news?

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