Companies can't buy venture capital love

Venture capital continues to become less adventurous than it used to be.

Companies backed by venture-capital investments saw first-quarter funding drop for a fourth consecutive quarterly decline, reaching a low not seen since mid-1999 and marking the largest sequential decline on record, according to a venture-capital survey released Wednesday.

The survey is further confirmation of the increasing difficulties that companies face in securing funding for start-ups. Over the past 12 months, rarely a week has gone by without a company announcing layoffs, closures or major restructuring because of a lack of funding. iMotors and PDQuick are some of the latest companies to announce plans to close shop because of a lack of funding.

Companies backed by venture capital saw investments fall to $10.1 billion in the first quarter, down 40 percent from the previous quarter and the largest sequential drop on record in absolute dollars, according to the MoneyTree survey by PricewaterhouseCoopers, in partnership with venture-research firm VentureOne.

And the number of financing rounds by venture firms, corporate investors, private equity firms and individuals into companies that have received at least one venture round tumbled 34 percent sequentially to 692 in the first quarter, according to the survey.

Venture capital, which accounted for the bulk of investments, fell 39 percent in the first quarter to $8.8 billion among 609 deals.

"You can see that venture investing has returned to a more normal pace of funding," said Tracy Lefteroff, global managing partner with PricewaterhouseCoopers' venture capital practice. "Prior to mid-1999, venture investing was in the $4 billion to $5 billion range on a quarterly basis."

Show me the money Venture-funded companies saw a decline in investments during the first quarter, with Net companies hit particularly hard. Here's a list of sectors and the funding raised in past quarters.

Sector

Q1 2001

Q4 2000

Q1 2000

Business services

$2.2 billion

$4.3 billion

$10.2 billion

Content

$255 million

$360 million

$847 million

E-commerce

$68.5 million

$119 million

$843 million

Infrastructure

$2.1 billion

$4.3 billion

$2.2 billion

ISPs

$1.1 billion

$824 million

$2.9 billion

Software/database

$1.6 billion

$3 billion

$4.4 billion

Source: PricewaterhouseCoopers/VentureOne

He added that the decline comes as the markets head south, and venture investors need to spend more time with portfolio companies and have less time to seek out new investments. Investors in private equity and venture funds are not able to reap any financial rewards until a company in the portfolio is either sold or launches an IPO--an event that can take years, if at all.

The average venture investment per company fell to $10.9 million in the first quarter, down from $13.7 million in the previous period, according to a separate survey released Wednesday by Venture Economics and the National Venture Capital Association. The survey noted venture investments declined to $11.7 billion in the first quarter--nearly half the $20.5 billion invested in the fourth quarter.

Virtually all technology sectors suffered declines, especially those seeking seed and first-round investments, according to the MoneyTree survey.

The communications sector, which saw a steady influx of investments last year, posted a 38 percent sequential drop to $3 billion. A large retreat by corporate investors contributed to the decline, according to the study. Corporate investors dropped their investments to $55.9 million in the first quarter, down roughly 84 percent from the previous period.

Internet investments dropped 43 percent sequentially to $7.6 billion in the first quarter. And even Internet infrastructure companies, which grabbed investor attention last year, fell 52 percent to $2.1 billion in the quarter.

Internet service providers, however, managed to post an increase to $1.1 billion from $824 million in the previous quarter. The gain was attributed mostly to large investments in a small number of companies, according to the survey.

Overall, companies that have some business relationship with the Internet no longer receive special notice from venture capitalists, who now take it as a given when evaluating a company for a potential investment, said Dave Witherow, chief executive of VentureOne.

Internet-related companies received an average investment of $10.4 million per company in the first quarter, while semiconductor and electronics companies received the largest amount, at $18 million per company, according to the Venture Economics survey.

A capital comeback
And while no one is predicting this year will shape up like last year's record-breaker of $70 billion in venture investments, industry watchers say it will nonetheless be healthy in historical terms.

"As we settle back down, we'll hopefully remain well above the 1998 levels (for investments). And right now, we're way, way above that," Witherow said.

Witherow noted he would not be surprised to see venture investments fall further in the second quarter and beyond, but he would be surprised if they dipped below the 1998 quarterly levels--roughly half the amount in the first quarter.

And while venture firms are sitting on a large stash of cash, these industry watchers noted that it will be more difficult for them to raise more money in the near term as limited partners begin to tighten up their investments into these funds.

An increasing number of limited partners are finding that private equity investments in their portfolios are representing a larger piece of the pie, as the markets decline and bring down the value of stocks in their holdings. Some limited partners, such as pension funds or endowments, may be limited on what percentage of their portfolios comprises private equity investments.

Nonetheless, Witherow said it will be interesting to keep an eye on which limited partners maintain or increase their commitments to venture funds. He said the smart money will continue investing in private equity, given valuations have dropped so low for a large number of start-ups.

"This is the best opportunity to put money in," Witherow said.