Record investments in Net firms

Venture capital investments in Net-related firms hit a record $887 million in 164 companies, a new survey says.

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Venture capital investments in Internet-related companies hit a record $887 million in 164 companies during the second quarter of 1998, according to a new survey announced today.

The survey found that investments doubled compared to the first quarter of 1998, and increased 42 percent over the second quarter of 1997.

The survey, dubbed the PricewaterhouseCoopers Money Tree Survey, was conducted by PricewaterhouseCoopers, one of the world's largest professional services organizations.

On average, approximately 500 venture capital firms participate each quarter, PricewaterhouseCoopers reported.

The survey found that size of the deals continued to grow. During the first half of 1998, the top ten Internet-related venture capital investments each surpassed $20 million, as an increasing number of investments shifted from early stage companies to expansion and later stage companies.

Of the ten largest deals in Internet-related companies, four exceeded $30 million and one reached $50 million. The numbers mark an upward trend from 1997, which saw three deals that were more than $30 million and seven deals that were more than $20 million, according to PricewaterhouseCoopers. During 1996, five of the top ten deals were less than $20 million.

"In the second quarter of 1998, the average Internet deal size was up 25 percent over the previous quarter compared to a combined 5 percent for all other industries," said Maureen Morrison, Internet cochair and global technology industry group partner. "Internet investments catapulted in the second quarter of 1998 by doubling the first-quarter numbers and nearly reaching the year-end total of 1996."

The survey covered approximately 500 venture capital firms and found that 164 deals or 24 percent of the 760 total venture capital investments made during 1998's second quarter were Internet-related.

The Money Tree survey also broke down investments by geography and found that the New York Metro area joined Silicon Valley and New England as one of the top regions for Internet investment.

Silicon Valley companies received 55 percent of Internet-related venture capital investments, with $487 million invested in 97 deals. New England was next with $218 million invested in 37 deals, and the New York Metro area followed with $93 million in 18 deals.

Colorado companies received $85 million. Internet-related companies in the southeast area of Washington, D.C., Texas, the Midwest, and Los Angeles/Orange County each garnered investments in the $60 million and $70 million range.

The majority of Internet investments were made in early and expansion stage companies during the second quarter of 1998. Early stage companies received $498 million and expansion stage companies received $476 million, respectively.

"Venture capitalists are pacing the natural evolution of Internet companies," said Morrison. "As the companies have moved from formative toward formidable, VCs are putting more of their dollars into expansion and later stage investments than we've previously seen."

The survey shows that Internet investments in early stage companies declined from 48 percent in 1997 to 37 percent in the first half of 1998.

In addition, an analysis of the survey data shows Internet companies specializing in services accounted for the largest share of Internet investments in the first half of 1998, with $455 million or 34 percent. Software captured 31 percent, and access/infrastructure segments garnered 29 percent of venture capital dollars in Internet-related investments.

"We are seeing a slight shift away from the software segment to the services and access/infrastructure segments," said Morrison. "Investments in Internet services companies should continue to increase as more businesses begin to take advantage of the explosion in e-commerce."

The survey tracks venture capital investments in the United States in all types of industries and was sponsored by PricewaterhouseCoopers's Global Technology Industry Group.