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VCs more frugal in first quarter

U.S. venture investments fell to $14.5 billion in the first quarter, nearly half the level raised a year ago, early figures indicate.

U.S. venture investments fell to $14.5 billion among 1,051 companies in the first quarter, nearly half the level raised a year ago, according to preliminary figures.

Last year, a whopping $27.7 billion was raised among 1,855 companies during a time when the markets were hitting record highs.

Effectively, the other shoe has dropped. Venture capital observers have long anticipated a slide in year-over-year funding levels as the markets tanked and IPOs dried up. Monday, the figures released by industry publication VentureWire confirmed those suspicions.

And despite the markets' downturn in subsequent quarters, venture capital investments had consistently outperformed comparable quarters from the previous year--until now.

"People are definitely pulling back and the supply has tightened as they work on their existing portfolio companies," said Ken Andersen, managing editor of the VentureWire Group.

Early-stage companies took the hardest hit, with only 327 companies getting funding in the first quarter--down by more than half from a year ago. These types of companies carry the greatest investment risk, because they often have a concept but no revenue.

Historically, venture investments sequentially dip in the first quarter and then ramp in the second, before slowing during the seasonally weak third quarter. Investments typically regain strength in the fourth quarter.

"The pace has changed in the first quarter. Normally we expect to see low numbers at the start of the quarter and then gradually increase in February and March, but that hasn't happened," Andersen said. "It'll be interesting to see what happens in the next month or so."

Based on the first-quarter performance, venture capitalists are on track to raise nearly $50 billion for the year, Andersen said. But that is a figure far short of the roughly $100 billion raised last year, according to VentureWire.

However, Andersen does not see the situation as dire.

"That would be a nice increase to 1999, if you throw away 2000 as an anomaly. It's still a strong industry and hasn't dried up," he said.

A strong rally in the markets, a stunning IPO and the billion-dollar funds that venture firms are raising can all serve as catalysts for venture investments, Andersen said.

"The VCs have raised billion-dollar funds and they have to start making investments," he said

Walden International, for example, said Monday it closed $1 billion for its Pacven V and parallel funds. The company plans to invest $5 million to $25 million in communications, software, Internet, semiconductors, electronics and life sciences companies in Asia and in the United States.

"I think we'll see a decline for another month or so, but by mid-quarter things may improve," Andersen said. "I would look for the second quarter to be at least equal to the first quarter, if not a bump up."