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Venture Capitalists: Full Speed Ahead – Investment rises to $19.6 Billion in second quarter in spite of the IPO slowdown

Despite the shakeout in technology and Internet stocks earlier in the year, venture capitalists remained confident in the promise of young, high-tech companies, lavishing larger lumps of cash than ever before on high-risk deals. In all, entrepreneurs received $19.6 billion in the second quarter — more than double the amount dished out during the same period a year ago, and up from $17.1 billion in the previous quarter of this year.

In all, VCs invested $36.7 billion in young companies in the first half of 2000, topping the $35.6 billion invested in all of 1999, according to the latest PricewaterhouseCoopers Money Tree survey. "There was an expectation on a lot of people’s part that the [second quarter] number might decrease because of the stock markets," says Kirk Walden, who directs the quarterly survey of cash-for-equity investments.

One measure of the VC bonanza: Of the 1,431 companies funded during the second quarter, 16 received more than $100 million each, in contrast with the first quarter, when there were just seven deals in that range. Of course, some of those deals are the result of a slowdown in the IPO market; rather than go public, the companies returned to the VC well for more cash. "The venture capitalists have so much money under management right now that they can afford to keep a company going until the market conditions are more favorable," says Walden.

A SLOWING PACE? But it wasn’t just later-stage companies that vacuumed up the cash. Startups and early-stage ventures remained in favor, too. According to the Money Tree survey, nascent ventures captured nearly $8 billion in cash and accounted for nearly half the companies funded during the second quarter. And both early- and expansion-stage companies received larger amounts, on average, than in previous quarters. Early-stage companies took in $11.6 million on average; for later-stage ventures, the figure was $18.6 million.

Behind those robust numbers, however, are signs that the breathless pace of VC investing may be slowing. While the total amount of VC investment continues to climb, the growth rate has leveled off. VC investments rose 16% from the end of 1999 to the first quarter of 2000, and just 14% between the first and second quarters of this year. "We believe we’re reaching a plateau," says Walden. Indeed, PricewaterhouseCoopers predicts that VC funding in the second half of 2000 will mirror the first half. That would mean a year-end tally of $70 billion, roughly twice that of 1999.

Even if that happens, don’t be surprised if fewer entrepreneurs end up sharing in the wealth. Robert Nelsen, managing director of ARCH Venture Partners in Seattle, expects to see fewer deals in coming months. But the average size of the deals, he says, will be bigger. The reason? With the e-commerce frenzy having faded and dot-coms crashing by the week, VCs are becoming choosier. At the same time, VCs have more cash than ever to put to work — thanks largely to institutional investors. So fewer — but bigger — deals make sense. The human factor can’t be ignored either. Says Nelsen: "Venture capitalists are getting a little tired" of poring over potential deals.

"PIPES AND PLUMBING." That weariness, however, has done little to dampen enthusiasm for all things tech related. By one measure, 95% of the cash invested during the second quarter flowed into technology companies, including Internet ventures. Under that broad umbrella, software ventures ranked first, capturing $4.71 billion, or 24% of all the cash. Telecommunications was a close second, with $4.39 billion. And business services — which includes Internet consulting and Web-based corporate training — ranked third, with $3.71 billion.

Among Internet companies, infrastructure and applications ventures remained hot, while content sites, B2B, and B2C ventures proved the least popular, receiving just a sliver of the VC pie. The preference for "pipes and plumbing" companies reflects a shift in thinking about the Internet, from an e-commerce medium to a general tool for doing business, says Walden. Only slightly fewer Internet companies were funded during the second quarter — 776, compared with 770 in the first quarter — but the amount they received, on average edged up 6%, to $15 million. Why such a high figure? Because "time is money," says Walden. Tech companies, and in particular Internet companies, face intense pressure to be first to market with their product or service.

Not surprisingly, Silicon Valley continues to reign as the mecca for VC investing. The region vacuumed up $6.9 billion in the second quarter. New England ranked second, with $2.6 billion for the quarter, followed by the Southeast (thanks largely to a $402 million telecommunications deal, the largest ever tracked by the Money Tree survey) with $1.5 billion. New York’s Silicon Alley placed sixth on the list, pulling in $1.1 billion.

With the appetite for technology still strong, says Walden, "you’d really have to have an event on the magnitude of the Asia collapse to completely derail this." A prolonged downturn would rob investors of one of their favorite strategies for recouping money from high-risk ventures: taking companies public. For now, though, the VC bullet train is still speeding ahead.

http://www.businessweek.com/smallbiz/content/aug2000/vc000816.htm

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