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Darwinism in full force for startups

Just when the worst of the startup attrition appeared to be
over, a new study portends further casualties among today’s
survivors.

by Vyvyan Tenorio The Deal.com

If venture financing continues to be constrained as it was
last year, many of the remaining private companies, not just dot-coms, will be in
danger of collapsing, according to an analysis conducted by San Francisco
industry research firm VentureOne Corp.

Already, since January 2001, 11% of venture-backed startups have gone out of
business compared with 6% which have had a liquidity event. Only 28% received
follow-on investments, while the remaining 55% raised no additional capital, with
more than half the pool looking for Series B funding.

Of the total pool comprising more than 7,000 startups seeking funding last year,
nearly 3,000 venture-backed companies have yet to raise additional financing, it
said. Of these, 51% are information technology companies, such as software,
communications, electronics and information services startups; 30% are in products
and services; and 15% are in healthcare.

Raising venture capital in 2001 was "significantly more difficult," VentureOne said.
The withering funding climate has also dealt a hard blow to seekers of Series A
rounds, few of which succeeded. The total number of initial fundings in 2001 fell
below 1996 levels.

Of those initial fundings, the software industry drew the most with 34% of Series A
fundings, followed by communications, with 16%. Healthcare companies’ share
doubled to nearly 20% of initial fundings, of which more than 50% were
biopharmaceuticals.

On the other hand, products and services, which accounted for a third of all initial
rounds in 2000, took in only 15% last year.

At highest risk are those companies engaged in selling products and services and
IT information services companies, VentureOne said. These include large
concentrations of dot-com companies that have survived the carnage of the past
two years.

VentureOne said for the products and services companies that did obtain follow-on
funding, 67% of the financings were insider-only rounds. "While raising money
solely from insiders doesn’t necessarily suggest problems, new investors are
certainly a sign of external validation," said Dave Witherow, president of
VentureOne, said in a statement.

The flip side: Those that successfully raised follow-on capital were predominantly
healthcare companies, by far the biggest winners. More than 40%, or 345, were
biopharmaceutical companies, followed by semiconductor companies, with 39%,
while medical devices and communications each accounted for 34%.

But healthcare services companies did poorly, with only 152 companies making
the grade. Consumer and business services, e-commerce and other retailers also
were at the bottom.

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