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Tech Industry

VC investments set record

U.S. venture capital investments soared to $12.8 billion in 1997, surpassing 1996's previous record levels by more than $3.2 billion.

Technology companies and Silicon Valley bellied up to the venture capital trough in 1997, hogging the bulk of U.S. investments.

Fueled by a strong economy and surging technology sector, venture capital Venture capitalist investments investments across the United States soared to $12.8 billion in 1997, surpassing 1996's previous record levels by more than $3.2 billion. Technology investments accounted for more than two-thirds of all investments, according to a Price Waterhouse National Venture Capital Survey released today.

Technology-based industries, including software and information; computers; semiconductors, communications; and anything related to the Internet; landed nearly $8.5 billion in venture capital during 1997, up from the nearly $6 billion during the previous year. The growth was driven by the changing landscape of venture investing, faster turnarounds on investments, and the acceptance of new exit strategies, like acquisitions.

The main goal of a venture capitalist is a profitable exit, and VCs increasingly are finding that start-ups don't have to go public to be successful. Five years ago, a VC-backed company would never have chosen an acquisition over an IPO, but the perception that acquisitions can't be profitable is rapidly changing.

Recent acquisition deals are driving that change, said Kirk Walden, a national director at Price Waterhouse. Take Hotmail, for example. Microsoft (MSFT) bought the venture-backed company for an estimated $400 million, an astounding sum for a business that is only a few years old. Hotmail was founded in 1995, and in July 1996, the free email provider began offering free Web-based email to Internet users.

Acquisitions of VC-backed companies, like Hotmail and Four11, are affecting the overall picture of VC investing. Investments are being turned around much faster than expected, meaning that venture capitalists get a return faster. This enable companies to reinvest the VC money sooner, which ultimately makes the VC wheel spin faster, said Walden, noting that the turnaround time on a venture capital investment used to be five years, whereas now it is three.

Big exit transactions like Hotmail also are steering the direction of venture capital investments in general, affecting what industries get funded going forward, said Robert Sullivan, chief executive of the investment marketing firm Makenna, Delaney & Sullivan.

"Now there will be a trend for bigger, better, stronger, Lucent forms VC fund faster email," Sullivan said, noting that everyone wants to improve on Hotmail's deal in hopes of getting carried on its coattails.

Acquisitions also are changing the dynamics of who is putting up the money up for such investments. More pension funds and corporations are taking advantage of venture investing, for example, because acquisitions have been producing returns of 30 percent to 40 percent in recent years.

Corporations also are putting their hands in the venture pot. A case in point is the $100 million Java fund, which targets companies developing Java and related Internet technologies. The fund's ten corporate partners span the tech spectrum from Internetworking giant Cisco Systems (CSCO) to hardware leaders Compaq Computer (CPQ) and IBM (IBM); from software makers Netscape Communications (NSCP) and Oracle (ORCL) to cable companies Comcast (CMCSA) and Tele-Communications Incorporated (TCOMA).

The corporate stake in venture investing grew to 30 percent in 1997, up from 13 percent in 1996. "From a corporate standpoint, it is a double hit," said Walden. "They get a return on investment and a first look at new technology that they may want, so it is both a financial and strategic reason to invest."

Some of the bigger corporate deals in 1997 were a $120 million investment in fiber optic developer E-Tek Dynamics; a $64 million investment in Netcom Systems; and a $56 million investment in Candescent Technologies, a developer of flat-panel displays.

In 1997, the communications and software segments of the tech economy attracted over $6 billion in investments--nearly half of all dollars invested and a nearly $2 billion jump from 1996 numbers. The 1997 figure marked a $3.3 billion jump over 1995.

Internet-related companies also continued to be showered with funding, as they watched their venture capital investments double, to $1.88 billion in 1997 from 1996, compared with only $133 million invested in 1995.

Geographically, the bulk of venture capital placement went to 12 U.S. regions. Hot markets included Los Angeles/Orange County, New England, the Southeast, and Texas.

Although Silicon Valley bested all other regions by more than $442 million in the final quarter of 1997 (New England was next in line), the region's performance in VC funds garnered declined in the fourth quarter, to $980 million, down from the $1 billion reported for the previous two quarters. Investments in Silicon Valley jumped 72 percent over the same period a year ago, and Silicon Valley-based companies accounted for more than one-quarter of all dollars invested nationwide.

Price Waterhouse's survey reflects the activity of 738 venture capital firms that identified 225 co-investors. Survey respondents totaled 513.