Internet and technology companies again drew the majority of the investments, as VC funding surged beyond the $3.79 billion generated in the year-ago quarter, according to the Money Tree Survey by PricewaterhouseCoopers. The previous record was set last quarter when $7.64 billion was invested.
"With 90 percent of venture capital flowing to technology companies, should venture capital investing be renamed technology investing?" asked Kurt Walden, the national director of the VC research for PricewaterhouseCoopers.
For the survey, PricewaterhouseCoopers included a range of companies in the technology category, such as Internet, communications, semiconductors, hardware, software, biotechnology and medical devices. Defined this way, technology companies accounted for $8.1 billion, or 90 percent, of VC investments in the United States in the quarter.
Investments in Net-related companies jumped almost fivefold to $5.2 billion, compared with $1.1 billion during the same period in 1998. The number of companies receiving the investments grew to 473 from 162. The survey noted that every facet of the industry showed record increases, including business-to-business and business-to-consumer e-commerce, infrastructure, content and software.
"The Internet sector really has been a case of a rising tide lifting all boats," Walden said.
Money flowing into the communications category during the quarter nearly tripled to $2.6 billion, while the software and information category drew $2.2 billion.
"With more than $18 billion invested in technology-based companies, (and) $10 billion of that in Internet-related companies through the first three quarters of this year, venture capital has to be recognized as a core component of technological innovation," PricewaterhouseCoopers managing partner James Atwell said.
VC investments reached $14 billion in all industries nationwide last year. In the first three quarters of this year that total already has grown by 50 percent to $21 billion, Walden said.
Regions set records
The survey also showed good news for regions other than Silicon Valley, which perennially attracts the lion's share of VC funds and this quarter broke the $3 billion mark for the first time. Practically every part of the country set new records: New England ranked No. 2 with $923 million, followed by the regions of New York City, the Southeast and the District of Columbia, each of which attracted more than $600 million.
"Silicon Valley is in no position of falling out of the No. 1 position, but the total share of the VC pie is not significantly increasing," Walden said.
"If I am an entrepreneur, this is great news for me because I don't have to go live in a one-bedroom bungalow tear-down," Walden said, referring to the housing crunch around Silicon Valley.
The survey also said companies in early stages of development garnered the most funding, receiving $3.33 billion, or 37 percent of the total. On average, each company received $6.6 million, up from $4.3 million a year earlier.
Companies in the expansion stage were close behind with $2.7 billion, or 30 percent of the total dollars. These companies received an average $10.1 million, up from $6.2 million in the third quarter of 1998.
Walden said that the kind of percentage increases seen this year probably will not be sustained in the near future as VC funding reaches a new plateau. But he does see Internet companies continuing to receive the bulk of the attention.
"It is almost set in stone that Internet companies will get most of the investments because there is opportunity there," Walden said. "Venture capitalists don't want to be in these businesses to run them, they want to quickly build them and pass them along."
The surge in VC investments almost guarantees a fresh crop of companies will be entering the public markets in the near future as they try to cash in on the hot market for initial public offerings. But Walden noted that an IPO is not the only option for many companies.
"Mergers and acquisitions are also a legitimate exit strategy for what I call 'one-trick pony' companies," he said. "These are companies likely to be acquired because they have terrific product ideas but not one to sustain them as a corporation for the next 50 years."