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Venture capital slipping
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August 13, 2001: 1:16 p.m. ET
Funds for emerging companies decline for seventh straight quarter
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NEW YORK (CNNfn) -
Venture capital investment in startups declined for the fifth straight quarter, as equity investments in venture-backed companies slid to $8.2 billion compared with $10.4 billion in the first quarter, according to the PricewaterhouseCoopers MoneyTree Survey released Monday.
Venture investment has not been at this level since 1999, when the amount of money being pumped into entrepreneurial enterprises began an ascent to record highs. Rather than lament the drop, however, analysts said the decline really represents a return to normalcy.
"The venture industry isn't out of the game," said Tracy T. Lefteroff, managing partner of PricewaterhouseCoopers' venture capital practice. "For all of 1998, $17 billion was invested. I believe the level of investment is still healthy."
Not surprisingly, Internet-related investments continued to spiral downward. Funding for Internet companies fell to the lowest quarterly level seen in two years, $5.7 billion. Investment in Internet companies peaked early in 2000 when total commitments reached upward of $22 billion in the first quarter and $19 billion in the second quarter.
Communications and networking companies were also hard hit in the second quarter, as venture capitalists soured on investing in fiber-optics and photonics companies, which had received the lion's share of investment for the past year.
Business services and software companies account for much of the decreased investment as those sectors fell 38 percent and 20 percent, respectively.
Those few that fared better during the second quarter were companies in the life sciences and health-care areas. Much of the momentum in the sector can be attributed to additional investments in biopharmaceutical companies, which attracted a total of $502 million and accounted for 40 percent of the group's dollars in the second quarter.
"We believe there is a bright outlook for that sector going into the future," said Lefteroff.
Corporate financial all but disappears
Another notable development in the second quarter was the retreat of both corporate-backed venture investing and private placements in the funding of startup companies. Funds from corporations, angel investors, and other sources outside of venture capitalist reached its lowest peak in three years.
"Venture capitalists have always been there," said Dave Witherow, president of VentureOne Corp., PricewaterhouseCooper's partner in the survey. "These other forms of investors arrived and then exited on the bubble."
Investment from corporations has all but disappeared. Corporations are investing less than one-tenth the amount they contributed in 2000. Corporate backing dropped from $3.8 billion in the first half of 2000 to $353 million in the first half of 2001.
Likewise, private placements of equity in the first half of 2001 are at one-third of last year's levels. And while venture investors are not immune to fluctuations, this quarter's totals still exceed quarterly venture investment rates just prior to the market "bubble" that began in Q2 1999.
The survey also revealed, however, that venture capitalists did alter their investing strategies somewhat.
Early round investments also declined from last quarter's record low. Now only about 15 percent of total investment dollars are going to companies seeking seed and series A rounds of financing. Traditionally, early rounds constituted about half of all deal flow.
Series B rounds dropped off as well, but later-stage companies saw funding increase by 8 percent, from $2.6 billion to $2.8 billion.
"The raw dollar increase in later round funding shows that venture capital firms are standing behind their existing portfolio companies," said Lefteroff. "They're focusing more resources, both money and time, on building those businesses. There's less time left to evaluate startups, but brand new companies with a solid business plan can still get attention and funding." 
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