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Summer sun dries up venture capital

Summer has finally caught up to venture capital as second-quarter investments in tech companies and across all industries fall for the first time in 15 years.

The dog days of summer have finally caught up to venture capital.

Venture capital investments in the second quarter fell for the first time in 15 years, according to a quarterly report by online industry trade publication VentureWire.

Venture capital across all industries fell to $8.9 billion in the second quarter, down from $27.4 billion in that quarter last year. The technology industry also mirrored those results, with $7.6 billion invested in companies during the second quarter this year, down from $24.8 billion a year ago.

"Venture capital has been on the rise for the past 15 years, so this is the first summer break (venture capitalists) have had in quite awhile," said Ken Andersen, VentureWire editor.

Andersen also noted that the historically weak third quarter will also likely post year-over-year declines.

"People are usually taking vacations and the pace of investing slows," he noted.

The traditional cycle usually has venture capitalists busy in the fourth quarter, followed by a sequential slowdown in the first quarter, and a hectic period in the second quarter.

That traditional pace, however, has been out of whack since venture capital investing reached a peak in the second quarter last year. Since then, venture capital has declined sequentially for four consecutive quarters.

But Andersen predicts venture investing will stabilize by the end of this year or the beginning of next year.

"VCs are busy clearing out their portfolios--either shutting down companies or selling them off. Once VCs look for new investments, it will stabilize the industry," Andersen said. "That's what drives the industry."

VC spending chart During the second quarter, optical investments held up well. The industry captured $1 billion in venture investments in the quarter, down from $1.3 billion a year ago, according to VentureWire.

Enterprise software, however, took a sizable hit, falling more than 50 percent to $1.1 billion in the second quarter compared with the same time last year.

"The overall decline in venture investing, when measured up against 2000, is striking," Andersen said. "But over $20 billion has been invested this year and it's shaping up to be a solid year."

Anderson, as with a number of venture capitalists, characterize 1999 and 2000 as years of "irrational exuberance." And when discounting those periods as anomalies, industry players note 2001 is expected to perform well from a historical perspective.