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Tech venture capital on a roll

Despite the market's recent volatility and a poor showing of late for technology-related IPOs, venture capital continues to flow into high-tech companies at a record pace.

Despite the market's recent volatility and a poor showing of late for technology-related initial public offerings, venture capital continues to flow into high-tech companies at a record pace, according to a Price Waterhouse national venture capital survey released today.

Venture capital in the third quarter hit a record $3.57 billion, of which high-tech companies attracted $2.3 billion, said Kirk Walden, the survey's national director.

Of the money raised, $794 million went to software companies, $797 million to communications companies, and $207 to computer and peripherals companies. Within these industries, those that deal with the Internet accounted for $459 million of the total capital raised.

High-tech companies, overall, attracted more venture capital money during the past nine months than in all of 1996, Walden noted.

Juniper Networks, which makes high-end routers for ISPs, bagged the largest venture capital investment for the quarter, Walden said.

Juniper raised a whopping $40 million in its third round of financing from, among others, giants like Northern Telecom, 3Com, and Siemens/Newbridge. This windfall brought the company's total financing to $56 million. Previous rounds of capital injection came from Kleiner, Perkins, Caufield & Byers, New Enterprise Associates, Benchmark Capital, Crosspoint Venture Partners, and Institutional Venture Partners.

One of the more interesting developments that the study revealed was the increased level of funding the communications industry captured during the third quarter, Walden said.

"Usually, software gets more investor money than the communications industry. Software usually gets about 20 percent more funding than communications," said Walden. "But this year, communications has caught up. Several factors contributed to this, and one is the increasing interdependence with telecom and the Internet. We saw a lot of investment for networking or infrastructure gear."

Scott Sandell, an associate with New Enterprise Associates, agreed. He said that, within the information technology industry, which is one of two areas of specialty for the firm, communications has continued to be a hot area for attracting investment.

He noted, however, that the climate for venture funding for technology companies currently is going through a cyclical dynamic.

Investors are pouring money into venture funds at a high rate, giving venture capital firms plenty of "dry powder," or capital that has yet to be invested.

But two events currently underway have the potential to affect the returns the funds may bring home to investors. Hence, investor enthusiasm may be affected down the road.

Sandell said the stock market is less receptive these days to technology IPOs than it has been during the past four years--and when a venture-backed company goes public or is acquired, that's when investors hope to collect.

Additionally, companies that are successful at launching an IPO may have to settle for going public at a price lower than desired, lowering the return on investment for the venture fund as a result. For companies that don't have an immediate IPO option, venture capitalists may have to use some of the company's "dry powder" to issue a second or third round of financing in order to keep it--and its investment--in a growth mode. Usually, though, the later rounds of investment don't offer as good a return as the first, Sandell said.

"It will be at least another two years before the powder runs dry," he said, "assuming there is not a liquidity crunch."

Paul Koontz, general partner with Foundation Capital had optimistic words regarding efforts to stoke the pipeline of funding amid efforts to maintain a healthy return on venture capital investment funds.

"There is so much money flowing into venture capital right now," he said. "I don't think the Internet will suddenly lose its appeal, because it offers such a revolutionary opportunity."