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Strike two: another quarterly decline in venture funding

Venture funding declines again in the third quarter, marking the first time since 1996 that funding has fallen for two consecutive quarters.

Venture funding declined again in the third quarter, marking the first time since 1996 that funding has fallen for two consecutive quarters.

Venture-backed companies raised $16.1 billion in the third quarter, a 6 percent decline compared with the previous quarter, according to a report released today by research company VentureOne. Last quarter's decline adds to an 8 percent drop in the second quarter.

In addition, the number of financing rounds fell 16 percent to 879 in the third quarter. That adds to a 6 percent sequential decline in the second quarter.

The results point to the effect of the weakened stock markets on areas such as venture investing, mergers and acquisitions, and initial public offerings.

Despite the slowdown, VentureOne research director Sasha Talebi noted, "Unless we have a tremendously slow fourth quarter, we're still on pace to double the total venture financing for the year."

Overall venture funding reached $52 billion for the first nine months this year, compared with $37.4 billion raised for all of last year.

Pulling in their horns
Venture funding declined in the third quarter to $16.1 billion. Below is the amount raised and number of Internet-related deals for the third quarter.

Sector Q3 '99 Q4 '99 Q1 '00 Q2 '00 Q3 '00
  Business Services     $2.7 bil
296
    $5.9 bil
413
    $7.9 bil
497
    $6.9 bil
450
    $4.6 bil
283
 
  Content     $430 mil
35
    $633 mil
60
    $756 mil
59
    $501 mil
46
    $484 mil
35
 
  E-commerce     $1.1 bil
49
    $1.5 bil
49
    $879 mil
36
    $469 mil
27
    $378 mil
17
 
  Infrastructure     $1.1 bil
63
    $1.6 bil
75
    $1.9 bil
88
    $2.3 bil
89
    $3.2 bil
110
 
  ISP     $380 mil
14
    $1.4 bil
29
    $1.9 bil
40
    $1.9 bil
27
    $1.3 bil
32
 
  Software/ Database     $1.2 bil
135
    $2 bil
172
    $2.9 bil
189
    $2.8 bil
198
    $3.1 bil
187
 
Source: VentureOne
Talebi added that venture firms also are focusing their investments on companies they initially funded, rather than pouring money into new companies.

Venture firms spent 75 percent of the overall funding on established companies that had received at least a second round of funding, rather than on the riskier initial funding rounds.

Driving the decline was a pullback in venture funding for Internet companies, which fell 21 percent in the quarter to 664 deals, and a 12 percent drop in funding to $13.1 billion.

Internet consumer and business services companies, which account for a third of venture-backed Internet deals, took the hardest hit in the third quarter. That sector fell to $4.6 billion--down 33 percent from the previous quarter. And the number of deals dropped to 283--a decline of more than 30 percent compared with last quarter and the lowest level since second quarter of last year.

The report contains a few bright spots for Internet companies, however. Internet infrastructure companies raised $3.2 billion in 110 deals, posting two consecutive quarters of growth and reaching record levels for both the number of deals and the amount of money raised.

Infrastructure companies, which build the hardware and software that constitute the Internet, are gaining attention among venture capitalists because they strike at the core technology needed to fuel the Internet.

Software and database companies, meanwhile, also posted an increase for the quarter. The sector rose 9 percent to a record $3.1 billion raised, but the number of deals fell to 187, a 6 percent decline over the previous quarter.