Net venture capital doubles

First-quarter funds sunk into Net-related companies skyrocketed to $309.1 million from $148.7 million a year ago, a study says.

Paul Festa Staff Writer, CNET News.com
Paul Festa
covers browser development and Web standards.
Paul Festa
2 min read
Internet-related companies got an A+ on Price Waterhouse's quarterly report card on venture capital investments.

The Price Waterhouse Venture Capital Survey, which was released today, reported that VC investments for the first quarter of 1997 inched up 5 percent over the same quarter a year ago, to $2.3 billion from $2.2 billion. The survey included results from 572 companies.

By contrast, the amount of money sunk into Internet-related companies skyrocketed to $309.1 million from $148.7 million over the same period. And 93 companies reported some Internet element to their business.

"The Internet is well suited to venture capital investing," said survey director Kirk Walden. "You don't require a huge sum. It's not like building a billion-dollar semiconductor factory."

The average investment for Internet-related companies was $3.3 million, according to Walden.

Some industry analysts, however, were skeptical of the results.

"Investment in new Internet companies has slowed," said Russell Snipes, an independent venture industry consultant.

According to Snipes, a large proportion of Internet venture capital goes to fund companies that received their first round of financing 12 to 18 months earlier.

Internet start-ups are facing two obstacles obtaining venture capital, he said. First, investors are feeling tapped out after a record level of investments last year. Second, Internet-related companies are facing difficulties launching initial public offerings.

Walden agrees that the venture capital market has cooled somewhat toward companies that focus strictly on the Internet. He noted there were no Internet service providers among the 93 companies that received venture funding in the first quarter.

"The appetite for those companies has declined," Walden said. "Practically all of the investment was in companies that are using the Internet as a means, rather than an end in itself."

Examples include Digital Insight, which provides Internet banking services for financial institutions, and FastParts, an online consortium of computer manufacturers trading excess inventory.

VentureOne president David Witherow said that his company showed, contrary to the Price Waterhouse findings, an actual decrease in overall venture capital performance compared with a year ago. During the first quarter, venture capital fell to $2.1 billion from $2.6 billion a year ago--a 19 percent drop.

But Snipes says the VC market is not cooling off for good.

Said Snipes: "If you have your mouth full of food, every once in a while you have to stop and chew."