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Tech drawing most VC money

Venture capital is what makes Silicon Valley work and there seems to be plenty of it in the Bay Area, according to a new survey.

Silicon Valley has a golden lining and it is called venture capital.

Apartment waiting lists, ultramodern condominium complexes, and computer company "campuses" characterize the region that is home to the digital revolution. But the fuel behind the fire goes beyond the brain power of engineers and visionaries. Venture money is what really makes things work, and there seems to be plenty to go around in the Bay Area.

Silicon Valley captured $821 million out of the $2.3 billion pouring into tech start-ups during the first quarter of 1998. That big chunk of change amounted to 36 percent of total technology funds for the entire United States, according to a Price Waterhouse survey released today.

New England was not far behind, collecting $544 million, or 24 percent, of the technology funds doled out during the first quarter of the year.

Beyond geographic hot spots, technology-based companies attracted 65 percent of all venture capital, which totaled $3.6 billion across all sectors for the quarter.

"There is not a shortage of funds to invest," said Kirk Walden, a national director at Price Waterhouse.

In the same quarter a year ago, technology venture capital totaled $1.49 billion, 64 percent of the total $2.33 billion across all sectors.

One reason for the increase in the amount of money being invested is the fact that VC is something of a self-fulfilling prophecy. "Start-ups require feeding," Walden said. He pointed out that young companies need subsequent rounds of financing beyond their first in order to survive, and the rounds that follow the initial investment typically are even greater than those previous.

Driving the growth in VC funds were rising investments in the communications category, as well as in the software and information category. Those two groups combined attracted more than half of available venture capital during the first quarter, with a total of 344 companies being funded.

The software and information sector broke the $1 billion mark for the first time, and showed the largest jump over the same quarter last year by pulling in $567 million. Growth in the communications sector primarily was fueled by telecommunications and the Internet, the report said.

The total amount of venture money being given to companies has increased as the number of companies receiving funding, and the dollar amount invested in each company, have increased proportionally.

The first quarter of this year saw 703 companies receive VC money. But Walden said the current growth rate of the economy cannot be sustained.

The amount of each investment is growing, and that is going to act to mitigate the growth rate, he said, noting that venture investing primarily is based on expectations of a return on investment. The average amount of each investment was $5.1 million, up from $4.1 million reported for the same quarter a year ago.

"If I have to give more to get less of the company, then the investment is [worth less]," Walden said. "Valuations are going up, and that means that a larger investment produces a smaller stake in the company, and a smaller return."

As companies move through their growth cycles and require more money, the dollar amount per deal should increase, but the number of deals should decrease because there is more to an investment than just the money, he added.

"VC firms are adding partners like crazy, but they are taking an active role in these companies, too," said Walden. "The money is important, but it isn't just the money."

Investing in a start-up takes time and energy as well. Young companies, for example, need guidance, as well as help, in recruiting top employees and forging alliances.

Walden predicted that VC firms have received a 30 percent to 40 percent average return on their investments during the past three years.