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Venture funding soars in 1999

Although funding records are set in nearly every sector in the fourth quarter, Net companies garner two-thirds of the capital.

Venture funding surged in the fourth quarter, setting a new record as investors scrambled to invest in young technology companies.

Although funding records were set in nearly every sector, Net companies garnered two-thirds of the capital, according to reports expected to be released this week.

In addition, Silicon Valley maintained its title as the capital of the venture capital world, followed by the Northeast region. Funding increased in all regions that were tracked.

Venture funding rose to $48.3 billion in 1999, compared with $19.3 billion the year before, according to a report by National Venture that is expected to be released tomorrow.

Meanwhile, VentureOne of San Francisco reported that funding topped $36.5 billion last year, up from $14.9 billion in 1998. Unlike the National Venture report, VentureOne's numbers do not include investments made by corporations, among other sources.

"There is an incredible amount of entrepreneurial activity going on," said Mark Ein, founder of Venturehouse Group in McClean, Va. "Everybody it seems either wants to start an Internet company or get involved with one."

Ein said he can't go anywhere without someone presenting him with a business plan for some new dot-com.

"I get hit up at restaurants, at parties, by taxi drivers," he said, adding that a colleague reported that he was followed into a public restroom by someone seeking funds for a new company. "It's startling."

Despite the unprecedented flood of financing, venture capitalists and researchers said the volume of deals reflected the strength of the underlying companies.

"It goes to show that there's good money out there and good companies to invest in," said John Taylor, director of research at National Venture Capital Association.

New records were set in many areas. Internet companies, for instance, got two-thirds of the total money, doubling their piece of the pie since 1998, both firms reported.

Also, the average amount that a company received climbed to $10.5 million, compared with $7.3 million in 1998, said Tamar Zemel, a spokesman for VentureOne.

The amount invested in the fourth quarter alone, $14.3 billion, startled some researchers and venture capitalists. During the last three months of 1998, venture investments totaled just $4 billion.

"It's a huge amount of money," Zemel said.

Part of the reason for such large disbursements was attributed to a desperate need for the young companies to spend money on branding.

As the market becomes more crowded, start-ups and older firms alike are having to spend millions of dollars on costly TV and newspaper advertising, Taylor said.

"They have to separate themselves from the rest of the crowd, and the only way to do that is spend money on branding," Taylor said.

The competition also is driving young companies to rapidly tap the public markets. As a result, the time between a first round of funding an initial public offering is being compressed, Zemel said. In 1993, for example, it would take a firm an average of 5.9 years to launch a public offering. In 1998, it took a company about 2.6 years. Figures for last year were not yet available.

According to National Venture, Northern California companies received roughly $16.2 billion in venture capital, the Northeast got $10.1 billion and Southern California attracted $4.2 billion. Among other regions, companies in the mid-Atlantic received $3.8 billion; the Southeast attracted $3.4 billion; the Midwest and Southwest each drew $3.0 billion; the Northwest got $1.9 billion; and the Rocky Mountain region checked in at $2.0 billion.

Overall, 3,619 companies received funding.

Venture capital firms typically raise money from individuals and other sources to be invested in promising start-ups. Demand for participating in such funds is so strong that venture capitalists reported they could have raised even more money last year than they did. In other words, there's more money than places to invest it.

"I don't see any signs of slowdown," Taylor said. "I think there is a very healthy future out there."