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Venture Capital Investment Dips

The 4% decline in the third quarter is the smallest since the dot-com collapse. Sales pick up at start-ups.

October 28, 2003|From Associated Press

SAN FRANCISCO — The three-year descent in venture capital investments tapered off in the third quarter amid signs the industry's wrenching downturn finally may be coming to an end.

Venture capitalists invested $4.2 billion in start-ups during the three months ended in September, a 4% drop from the same period last year, according to a survey to be released today by Thomson Venture Economics, PricewaterhouseCoopers and the National Venture Capital Assn.

It was the smallest year-to-year decline during a venture capital contraction that began in the final quarter of 2000, when the fallout from the dot-com bust began to crush investment portfolios.

Although the losses from the industry's $161-billion investment spree during 1999 and 2000 are still piling up, there's "a lot less trepidation in the venture community now," said John Jaggers, a general partner with Sevin Rosen Funds, which has offices in Palo Alto, Calif., and Dallas.

Venture capitalists are drawing hope from a recent surge in high-tech stocks that seems likely to stimulate more interest in the kinds of companies that they typically finance.

The ripple effect from the surge probably won't become evident for six or seven more months -- the typical amount of time venture capitalists take to review a prospective investment, said Deric Emry, a general partner with ABS Capital in Baltimore.

Venture capitalists are diversifying beyond their bread-and-butter holdings in information technology start-ups.

In the third quarter, venture capitalists poured $830 million into biotechnology, more than any other sector. It was the first time in seven years that biotech had topped the venture capital industry's quarterly investment list.

By comparison, computer software -- the second-most-popular niche -- attracted $819 million in venture capital during the third quarter. Investments in telecommunications start-ups fell to a five-year quarterly low of $492 million. Venture capitalists invested $26.5 billion in telecom during 1999 and 2000.

In a sign that the industry may be regaining its financial equilibrium, the level of venture capital investments has been $4 billion to $4.6 billion in each of the last five quarters.

Although those figures underscore how far the industry has fallen since its quarterly investments peaked at $28.6 billion during the first three months of 2000, they also suggest that things have stabilized, said Jesse Reyes, a vice president with Venture Economics.

Venture investments this year are expected to total $16 billion to $20 billion, the lowest level since 1997.

In an upbeat sign, sales are picking up at many start-ups as big companies begin investing in high tech again, said Jack Harrington, a general partner with Advanced Technology Ventures, which has offices in Palo Alto and Waltham, Mass. About 75% of the companies in Advanced Technology's portfolio are growing this year, compared with about 25% last year. "It certainly feels like things are getting better," Harrington said.

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