After long dry spell, start-ups get cash

For the first time in three years, money pouring into business start-ups is on the rise.

By Jim Hopkins, USA TODAY

Not only is that a good sign for the beleaguered technology sector, but it also boosts the overall economy because start-ups create jobs and innovations.

"The worst is behind us," says Sung Won Sohn, chief economist at Wells Fargo.

Venture-capital investments in start-ups — mostly in biotech — soared 13.6%, to $4 billion, in the second quarter from the first quarter, says a survey out today by San Francisco researcher VentureOne.

That VCs are boosting investments shows they expect economic growth ahead, and want to place bets while start-up values are cheap, Sohn says.

One quarter’s rise doesn’t guarantee a lasting shift. And the quarter’s total remains well below the record $26.9 billion in the first quarter of 2000.

Still, the jump follows other hopeful signs. Major corporations plan bigger tech budgets next year after two years of declines. Many tech companies’ second-quarter earnings met or beat expectations. The tech-rich Nasdaq index is up 55.3% from its Oct. 9 low.

Behind the boost in second-quarter investments:

• Biotech. VCs pumped $745 million into companies engineering cancer-fighting and other drugs — almost double the amount in the first quarter. The share of overall VC money in such drug ventures soared to 18.6% from 10.9% in the first quarter.

Frazier Healthcare and Technology Ventures in Seattle led a $28 million investment in QuatRx Pharmaceuticals in Ann Arbor, Mich. Started in 2000, QuatRx targets drugs for cardiovascular and other diseases.

Frazier expects to make 10 similar investments this year vs. seven last year, founder Alan Frazier says.

More VCs are drawn to the sector because the drug pipelines of some pharmaceutical giants are starting to dry up. That means more will turn to start-ups for drug ideas, says Larry Neiterman, chief of Deloitte Consulting’s health care practice.

• Information technology. Overall IT investments were nearly flat from the first quarter after falling steeply every quarter since early 2000. The strongest IT investment: software, up 24.7%.

• More optimism. Many VCs spent the last three years nursing start-ups left behind after the market for initial public offerings all but closed, VentureOne says. Such IPOs allow VCs to profit from their investments. VCs are now preparing to nudge some of their portfolio companies into public ownership when demand for IPOs rebounds. That will clear the way for fresh start-up investments.

Boding well for tech IPOs: Internet service provider iPass jumped 33% on Thursday, its first day of trading.

http://www.usatoday.com/tech/news/2003-07-28-startups_x.htm