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VC funding sinks to pre-boom levels

A mere $5.7 billion was handed out to start-up companies in the second quarter of this year, the lowest amount since 1998, according to a new survey.

Tech Industry
A mere $5.7 billion was handed out to start-up companies in the second quarter of this year, the lowest amount since 1998, according to a new survey.

The MoneyTree survey released Tuesday by PricewaterhouseCoopers, Thomson Venture Economics and National Venture Capital Association found that funding dropped 11 percent from first-quarter levels, and a whopping 30 percent from the same period a year ago.

Venture funding was at its peak during the first half of 2000, when technology IPOs hit the markets by the dozens and Net stocks fueled the Nasdaq's meteoric rise. Over this six-month period, VC firms gave out more than $50 billion to new companies. Yet with the collapse of the market and slump in the technology sector, venture capitalists have tightened their belts.

A separate survey said $5.1 billion was doled out to start-ups in the same period, according to VC research firm VentureOne and accounting firm Ernst & Young. The VentureOne report was released last week.

Though the decline in funding has been jarring, 2002 may likely go down as the third or fourth biggest year ever for venture financing. The PricewaterhouseCoopers report expects financing to equal or exceed financing during 1998, when more than $22 billion was raised.

"This kind of level is more than sufficient for traditional venture capital," said Kirk Walden, national director of venture capital research at PricewaterhouseCoopers.

Traditional venture financing includes the provision of funds as well as management resources, including board members and staff. During the boom years, management involvement by VCs was often lacking, Walden said.

Software developers led the funding charge in the second quarter, according to both surveys. Software start-ups grabbed $1 billion for the quarter, followed by biotechnology companies with $958 million. Medical device companies, the third-largest group, garnered $556 million in funding, according to the MoneyTree report.

Biotech funding has continued a steady pattern of growth over the last several years, Walden said.

Despite a lukewarm market for e-business applications, software is still attractive to venture capitalists as the process of developing software isn't capital intensive; it doesn't require significant up-front investment in factories, equipment or inventory, for example.

Venture capital firms also like that software itself is a broad category, ranging from computer games to inventory management systems.

"Software is the perennial leader," Walden said.

Separately, the number of companies raising an initial round of venture capital has been increasing slightly over the last several quarters, indicating that venture capitalists are still willing to take a chance on new ideas and growing companies. A quarter of all companies that raised funding in the second quarter were collecting their first round of financing, according the MoneyTree report.

"Companies getting funding today will require care and feeding," Walden said. "So the flow of funds will continue. It would be a great concern if VCs were shifting their pattern to invest only in later stage companies."

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