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Despite market woes, venture capital still chugging

Even with the recent stock market stumbles, venture capital investments keep growing at an almost undaunted pace.

    Even with the recent stock market stumbles, venture capital investments keep growing at an almost undaunted pace.

    Two surveys on the venture capital industry reported that investments hit record highs in the first quarter of the year--January through March--before the market took a nosedive. Many people in the industry said that while there may be a small slowdown in investments, the momentum is likely to march on.

    Venture investing is unlikely to subside this quarter because venture capital firms last year had a record fund-raising run, industry insiders and venture capitalists say.

    Firms have brimming treasure troves that need to be invested. Pension funds and other large investors hand hundreds of millions of dollars to venture capitalists and demand the kind of returns expected from venture investing. Just this week, Softbank closed a $1.5 billion fund.

    "Since we can't just put that money in a bank and earn interest, we will have to invest in a lot of start-ups," said Bill Burnham, a general partner at Softbank Venture Capital.

    Venture capitalists said that hard times for public companies and those looking to go public may be a windfall for venture firms.

    "Valuations of most companies are way down," said Sandeep Thakrar of venture firm Katalyst.

    He added that start-ups compare themselves to public companies when finding valuations for venture capitalists. With the shares of public companies down, early stage firms are finding themselves worth a lot less in the eyes of venture investors.

    "Basically, VCs are getting more of a company for a lot less money. It's a good time for venture firms," Thakrar said.

    The surveys, one published by PricewaterhouseCoopers and the other a collaboration between the National Venture Capital Association and Venture Economics, reported similar figures for the first quarter. PricewaterhouseCoopers said $17.22 billion was invested in entrepreneurial companies, compared to $4.21 billion a year ago and $14.69 billion in the fourth quarter of 1999. National Venture's study found that venture capitalists pumped $22.7 billion into companies, compared to $6.2 billion a year ago.

    Both studies discovered that the bulk of the investments were in Internet- and technology-related companies. PricewaterhouseCoopers noted that 93 percent of the funding went to technology and Internet companies, while National Venture found the figure closer to 95 percent.

    "What we are hearing from venture capitalists is that there is still a very good supply of companies out there to be funded," said John Taylor, director of research at National Venture. "The quality of the ideas and entrepreneurs remains very high."

    Softbank's Burnham said that the pace of investments will slow only if money coming to venture firms begins to dry up. Still, venture capitalists are becoming more cautious because of the teetering markets.

    "It's a much less euphoric environment both in the public and private markets," Burnham said. "There are many interesting sectors and ideas out there, but having everyone sober up once in a while isn't exactly a bad thing."

    Venture capitalists are being more selective about which companies to support. In 1999, about 55 percent of Internet-related venture investments were in business-to-business, e-commerce or content Web sites, according to Kirk Walden, national director of PricewaterhouseCoopers venture capital research.

    In the first quarter of 2000, 58 percent of the investments went to Internet-related companies working on access and infrastructure, tools and applications, or services.

    "There is still a recognition of the interdependence between the so-called plumbing side and the content side," Walden said. "One can't get too out of synch with the other, or the Internet industry won't grow."

    Venture capitalists may be forced to pump more money into companies they invested in last year to help them mature. Walden said that about 2,000 companies funded last year are in their formative stages and are soon due for more investments.

    "A VC can't in good conscience walk away and let the company go belly up. They'll lose all the money they put up front," he added. "There is a certain momentum there; the pipeline is full of companies."