Finally, as 2001 ended, venture capital investment hit a welcome plateau--one we hoped signaled the end of the declines.
But in the first quarter of 2002, investment in venture-backed companies fell sharply once again. And so the question has returned to haunt us: "Is this rock bottom?"
The answer, if it lies in the data, is equivocal.
At $5.1 billion, the amount invested in the first quarter represents a 26 percent decrease from the previous quarter and a fraction of the amount invested in venture-backed companies at the peak of the boom. And yet, several sectors--communications, electronics, and medical information services--did see minor increases in investment.
And there are glimmers of promise even in areas where investment dropped. For example, a cursory glance at the health care sector shows a 30 percent decline in investment this past quarter--not particularly heartening.
But dig a little deeper, and you'll see that health care investors have sharpened their focus on early stage companies; fully 43 percent of the health care deals done in the first quarter were seed or first rounds, setting the stage for future industry growth.
Compare that with the declining ratio of young to older companies financed in information technology and products and services. The percentage of early stage rounds in these two sectors has been decreasing steadily since early 2000--when seed and first rounds accounted for roughly 60 percent of the deals--and has now reached roughly 30 percent.
There are glimmers of promise even in areas where investment dropped.
Why? Because as venture capitalists painfully excise their portfolios and award follow-on funding only to their most promising companies, they have limited time and energy to devote to new companies.
Consequently, the steepest declines are in the categories that previously grew disproportionately large, such as products and services--the sector that once included erstwhile icons such as Pets.com and Webvan. At their peak, products and services companies raised $9.3 billion and accounted for 35 percent of investment. In contrast, during the first quarter of 2002, these companies represented only 9 percent of total investment--just $460 million.
Venture capitalists' fund-raising activity adds another layer of ambiguity to this already enigmatic picture. Commitments to venture capital funds dropped sharply in the first quarter, from $9.1 billion to $2.3 billion--marking the first time in more than a year that VC investments topped commitments by limited partners.
On the one hand, this may be viewed as cause for further pessimism and a sign of limited partner unrest. But many VCs simply have enough cash stockpiled and will now continue to work through the excess capital generated during the boom, rendering extensive fund raising unnecessary.
Neither the renewed decline in venture investment nor the sudden drop in fund-raising commitments is a harbinger of doom.
In some cases, that means continuing to weed through portfolios and adopt the lessons learned during the Internet boom and bust. In others, there's a chance to explore new initiatives. And whether the second quarter brings a leveling off, a decrease, or even an increase in investment, the venture business will continue its gradual evolution toward a less-volatile status quo.