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Report: Tech funding still on the decline

Investment in tech companies fell for the third straight year in 2003, though the last quarter held out some hope for the industry, according to a new survey.

The investment money flowing into technology companies dropped for the third consecutive year in 2003, according to a report released Monday by VentureOne.

Venture capitalists put $9.3 billion into tech companies, compared with $12.6 billion the previous year--a decline of 26 percent. Information technology deals dropped to 1,102 from 1,281, down 14 percent, the report found.

But there was some good news for the cash-strapped tech industry in the last quarter of the year, which saw a slight sequential increase in funding, according to the report.

"The positive thing with tech was that it was up slightly in the fourth quarter and mirrored the overall trend for venture investing," said John Gabbert, vice president and research director for VentureOne.

Across all industries in 2003, venture investments fell to $16.9 billion, down from $21 billion. But in the fourth quarter, overall funding rose to $4.5 billion from $4.2 billion in the previous quarter.

In the same period, IT investments increased to $2.3 billion, up from $2.1 billion in the third quarter. That marks the first time IT venture funding has shown sequential growth since 2000, according to VentureOne.

"In some ways, the quarterly time frames can be arbitrary. There might have been some big deals that didn't close and spilled over to the next quarter. But I would expect that 2004 will at least be on a par with 2003," Gabbert said. "We're starting to see a moderate level of IPOs, an increase in early-stage investing and VCs (venture capitalists) are in the final stages of working through their portfolios."

Software and semiconductor companies managed to attract slightly more venture money last year than in 2002. Software industry funding grew to $1.4 billion, compared with $1.38 billion a year earlier, while semiconductor companies captured $559.7 million in investment, up from $536.2 million, according to the report.

"Software is a bellwether for VC investing. We see a lot of interest in that, because it's capital efficient. The VCs have a definable milestone for funding; they have a lot of experience with these types of investments, and it's an area where they have historically had a lot of success," Gabbert said.

Though the semiconductor industry is typically cyclical, the increase in funding last year may be the result of growth in the market for chips to serve the wireless industry.

Two companies that provide voice-over-Internet Protocol (VoIP) services managed to make VentureOne's top 10 list of the largest IT deals in the fourth quarter.

Grande Communications, which uses cable to provide high-speed Internet access and phone services, landed $45 million in a fourth round of funding. And Vonage, which provides VoIP and high-speed Internet access, secured $35 million in a first round of funding.

"Communications will be an interesting sector to watch. It's had a big shakeout over the last few years, and the investment levels are down to the 1996 level. This will be one area to keep an eye on," Gabbert said.