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Tech Industry

Venture capitalists still shunning IT

Information technology companies continue to face sharp declines in venture capital investments, with information services taking the greatest hit in 2002.

Venture capital investments in information technology companies fell 48 percent in 2002, with information services companies taking the greatest hit, according to a new study released Monday.

The malaise continued into its second year, especially for companies seeking their first funding round, said the joint report released by Ernst & Young and VentureOne.

Technology companies received $11.7 billion in venture funding last year--down nearly half from the previous year and a 79 percent drop from the go-go period of 2000. Meanwhile, venture investments overall fell to $19.4 billion, down 44 percent from the previous year.

IT companies received 1,173 rounds of funding last year, with the median round reaching $7 million. That's down from 1,782 rounds the previous year, with a median round of $8 million.

"We knew it would be down for the year, but it's still surprising to see how far it's been down and how few early-stage companies are getting funded," said John Gabbert, vice president of worldwide research at VentureOne.

The median amount of funding for IT companies seeking their first round was $5.45 million, while companies in their second round received a median of $8 million and later-stage companies $9 million.

The information services industry was particularly hit hard. Last year, the sector raised $550 million--a sharp drop from the nearly $1.9 billion received the previous year, according to the report.

"Companies were consuming a lot of IT consulting services when their businesses were growing rapidly. But now, people aren't looking to outsource as much as they used to," Gabbert said. "As a result, there is less interest in investing in that sector."

Despite a sizable drop in IT investments in 2002, Gabbert anticipates better days in the future.

"I think we've hit a plateau," Gabbert said. "I would imagine it will rise from its current levels over the next year."