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Shellshocked venture capitalists avoid risks

With losses from their high-rolling days still piling up, shellshocked
venture capitalists continued to shun new risks in this year´s third
quarter, dropping the industry´s investment activity to a four-year low,
according to a report released Tuesday.

Venture capitalists invested $4.48 billion in startups during the period
ending Sept. 30, the weakest quarter since the first three months of
1998, according to a survey compiled by PricewaterhouseCoopers,
Venture Economics and the National Venture Capital Association.

This year´s third quarter represented a 48 percent decrease from the
same time last year, when venture capitalists poured $8.68 billion into
startups, the report said.

It also marked the ninth consecutive quarter in which venture
capitalists curtailed their investments from the preceding three-month
period.

Even off the beaten path, in places like Boise, venture capital investments have slowed
significantly.

“It´s really the whole West — from the Bay Area to Seattle to Salt Lake City to Boise, the deal
flow is down and investments are down,” said Tom Loutzenheiser, managing partner for Akers
Capital in Boise and Sacramento.

Loutzenheiser argues that investment levels have decreased to a more reasonable pace.

“Places are still making investments, albeit at a lower rate,” he said. “Because of the
uncertainty in the economy, investors are taking a more cautious approach.”

Mark Solon, managing partner for Highway 12 Ventures in Boise, agreed.

“The venture business is an asset class just like stocks or bonds, and the downturn affected
us too,” he said.

But Highway 12 started its fund after the dot-com bubble burst, meaning 90 percent of its
funds still are uninvested.

“Our timing was good,” said Solon, adding that as the economy picks up again, Highway 12
will be ready to invest. He added that large funds that have decreased investments will soon
be looking beyond the known technology centers of Boston, the Silicon Valley and Austin,
Texas.

“When it comes time for places out here in Boise to get funding, the odds of getting attention
from these firms are much higher,” said Solon. “They have money that has to be put to work.”

The reasons for the downturn have remained largely unchanged since the Internet gold rush
turned into a financial bloodbath during the spring of 2000.

As the stock market began to turn a cold shoulder to dot-coms and other high-tech
businesses, venture capitalists found themselves stuck with unprofitable startups that no one
else wanted.

Meanwhile, even promising startups are finding it increasingly difficult to find customers
interested in spending heavily on technology, further reducing their chances of survival and
saddling venture capitalists with the worst losses in the industry´s history.

“We all have had a very cold shower,” said Bob Grady, a venture capitalist with the Carlyle
Group.

Most venture capitalists and analysts believe the industry´s investments will dwindle even
more in the next few quarters.

“We haven´t seen the end of the decline,” said Robert “Robin” Bellas, a general partner with
Morganthaler Ventures. “My gut feeling is that this won´t stop until we get down to $2.5 billion
to $3 billion per quarter.”

Venture capitalists have responded to the adversity by shoveling more money into the best
startups in their existing portfolios and investing less in new opportunities.

The number of startups that received their first infusion of venture capital during the third
quarter totaled 159, the lowest number in nearly eight years, according to the report. Back in
the heyday of dot-coms in late 1999 and early 2000, nearly 1,000 startups per quarter were
getting their first dose of venture capital.

The wariness is causing venture capitalists to shy away from the industry´s traditional
high-tech stronghold.

Information technology startups attracted 59 percent of the venture capital during the third
quarter, down from the industry´s historical average of 70 percent, Taylor said.

In the high-tech sector, venture capitalists are focusing more on software startups, which
typically burn through less money than hardware companies. Software accounted for 22.2
percent of venture capital investment in this year´s third quarter, up from 17.6 percent last
year.

While touching upon familiar themes, Tuesday´s report provided another reminder of how
dramatically the venture capital industry has changed in two years.

Even as dot-com mania began to fade, venture capitalists still invested $26.7 billion during the
summer of 2000. At their current pace, venture capitalists will invest less than $23 billion for
all of 2002.

On The Net

• PricewaterhouseCoopers: http://www.pwcmoneytree.com

• National Venture Capital Association: http://www.nvca.org

http://www.ventureeconomics.com

http://www.idahostatesman.com/Business/story.asp?ID=24174

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Seed money drying up for the newest start-ups
By Matt Marshall
Mercury News

Venture capital investments fell sharply in the
third quarter, and the decline was most worrisome
for the earliest-stage companies — those that are
just starting to get off the ground.

Investments into the newest start-ups, or in
companies receiving their first round of venture
capital, dropping to six-year lows, according to the
MoneyTree survey released Monday by
PricewaterhouseCoopers, Venture Economics and
the National Venture Capital Association.

The data suggests entrepreneurs starting new
companies are having a harder time raising
money than executives at companies a couple of
years old, with a working product, and who are
searching for so-called “follow-on” capital.

Companies receiving their first round of capital got $1.03 billion, down from $1.22 billion in the second quarter,
and the lowest level since 1996. The number of such companies dropped from 214 to 159, the lowest in eight
years.

The Bay Area mirrored the national trend, with only 36 companies receiving a total of $327 million in venture
capital in their first rounds.

The survey found that venture capital investments into companies at all stages of development dropped to
$4.5 billion, down 26 percent from the previous quarter.

It confirmed an earlier report — released Friday by Ernst & Young and VentureOne — that showed a drop in
total investments by almost a quarter from the second quarter.

Both surveys suggest overall venture capital investment levels are at four-year lows.

The MoneyTree survey also confirmed the cool-off in investments in life sciences. After a string of buoyant
quarters, biotechnology investments declined 52 percent to $468 million, while medical devices fell 28 percent
to $448 million.

Life sciences had been considered by some as a safe haven from the fallout in the high-tech sector. But stock
market woes, delays in regulatory approval of new drugs and a high-profile insider-trading scandal at a drug
company exacted their toll on the sector, according to Tracy Lefteroff, global managing partner of the venture
capital practice at PricewaterhouseCoopers.

The insider-trading scandal pertains to ImClone Systems, a troubled biotechnology firm. The Securities and
Exchange Commission notified lifestyle maven Martha Stewart last week that it intends to pursue civil
securities-fraud charges against her in connection with her sale late last year of shares in ImClone.

Lefteroff said investors have become wary of funding biotech companies when they have no idea when the
stock market will again become hospitable to initial public offerings. “Biotech companies are like hungry
children,” he said. “You’ve got to keep funding them.”

Still, Lefteroff said the long-term fundamentals of the life-sciences sector look more promising than many
other industries, particularly the telecom sector.

http://www.siliconvalley.com/mld/siliconvalley/4393782.htm

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