Venture capitalists bullish

Venture capitalists doubled their bets on technology companies during the third quarter, often looking beyond the usual breeding grounds of California's Silicon Valley and Massachusetts's Route 128, according to a Price Waterhouse survey published today.

Companies in the computer and Internet space attracted about $600 million in venture capital from total VC investment of $2 billion for the July-to-September quarter. Technology companies in general, which run the gamut from health care to hardware, attracted about 50 percent more capital than the same quarter a year ago, the national accounting firm said in the National Venture Capital Survey, which can be found on the company's Web site.

Price Waterhouse's Kirk Walden, who wrote the report, said Internet and computer-related investment has deepened dramatically, rising to 70 percent of all venture capital investments from about half of the investments for the same quarter a year ago.

"Software and information services are what are driving venture capital investment," Walden said. He attributed the situation, at least in part, to growing interest in business opportunities involving the Internet.

While the survey did not discuss the recent narrowing of market opportunities and cooler Wall Street receptions of technology offerings, these may have played a role in the upturn of private investments in newer and lesser-known firms. Venture capitalist Ann Winblad, a general partner of Hummer Winblad Venture Partners, said the opportunities have changed but her interest has remained the same in "large opportunities that can potentially yield large companies."

"A lot of focus is going into software companies right now because they are the ones that will eventually own the opportunities," Winblad said. As an example, Winblad points to Net Perceptions, a company that makes tools to help companies predict online buyers' purchasing preferences, as one new form of the digital technologies that look to enable new forms of commerce.

"It takes a lot of software and hardware...to provide multiple business opportunities as we expand this digital universe."

Russell Snipes, a research analyst with Venture One, concurred that Internet business is booming. According to his research, funds raised by venture capital portfolios strictly for Internet-related businesses have risen from 50 deals, worth a total of $133 million in 1994, to more than 200 deals worth $1.13 billion for the first nine months of this year.

"The venture capitalists see huge opportunities for potential investments" to lay down the infrastructure of an increasingly "wired" world and pay for developing the tools people will need to navigate it, Snipes said.

So far, this has been a boom year for venture capital investments. Total investment in 15 industries rose nearly 25 percent, or an extra $40 billion, compared to the third quarter of 1995. For the nine months ended September 30, venture capital investment reached $7 billion, coming close to surpassing the $7.5 billion mark for all of 1995, the survey stated.

According to the study, 444 companies benefited from the VC largesse, including the likes of Herndon, Virginia-based NetStart, which got $1.5 million; Marimba, which received $4 million; and Houston, Texas-based Paradigm Geophysical, which received $12 million for developing computer-aided software used for oil exploration.

Walden expects Internet businesses to continue to attract the lion's share of investments. "Because the Internet is so amorphous, [that's] a sign that it has not realized its full potential yet."

The Internet boom may also factor in the growing investments by venture capitalists into several regions of the country that have not interested them in the past. "If you are in an Internet-related business, geography is meaningless to you," he added, suggesting that "we may finally be realizing the 'global village.'"

Jeanne Lazarus, a representative of the National Venture Capital Association, an industry group that endorsed the report, agreed that technology companies are helping to effect change in the national investment landscape.

"We have been saying the past year and a half that venture capital's ability to raise money is greater today than it used to be," Lazarus said. As investors begin to look "beyond the traditional areas of Silicon Valley and New England," they are finding an increasing number of new "entrepreneurial hubs" springing up in half a dozen regions of the country.

The number of high-tech companies in the Southeast receiving VC money rose to a surprising second place, capturing $317 million and knocking off the traditional number-two region of New England, which took in $214 million in investment. Midwestern companies took $153 million, while Texas shared fifth place, the survey shows.

The Lone Star state has emerged in recent years as a telecommunications and software hotbed. From July to September, 21 Texan companies took home $144 million in venture capital. Nearly two thirds--$88 million--went to telecommunications and software companies, according to Price Waterhouse.

Lazarus also points to such nontraditional computer industry locales as the Washington, D.C.-Northern Virginia area, home to several computer industry start-ups as well as big names like America Online and UUNet.

While Snipes said places like Texas, Colorado, and Washington state have been attracting developers for several years, Silicon Valley and the Boston area with their established businesses, marketing and development infrastructures, and large programmer communities will continue to be beacons for the industry.

Even Winblad, who recently struck an Internet deal with a company in Minneapolis, said she is also skeptical about regional appeal. "Silicon Valley is still the Mesopotamia for software creation."