VC investing hits three-year low
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 12:40 AM ET May 1, 2002
SAN FRANCISCO (CBS.MW) - The business of investing in start-ups went from throwing cash on bonfires to taking precious dollar bills and sticking them in mattresses.
The mattresses remain pretty stuffed these days as venture-capital investing declined for the eighth straight quarter to the lowest level since late 1998, according to new survey to be released Wednesday morning.
Venture capitalists invested $6.2 billion in the first quarter of 2002, slightly below the $6.3 billion invested in the last quarter of 1998, according to a MoneyTree survey conducted by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association.
The amount invested in the first three months of this year is down 24 percent from the final quarter of 2001. It's also less than half of the $12.8 billion invested in the first quarter of 2001 and a fifth of the $29.1 billion invested in the first quarter of 2000 -- the high-water-mark quarter of VC investing. In that period, 2,184 companies were funded.
In the first quarter of this year, 787 companies received funding, down from the 1,010 companies funded in the fourth quarter of 1998, when a similar amount of funds were invested. Yet only 19 percent of funds are going towards early-stage companies in the first quarter vs. 30 percent in the final quarter of 1998.
That suggests that this time around, fewer companies are getting attention. And the few receiving funds are those that have already raised initial investments.
This seems to be the case, partly due to the decline in corporate VC activity. "In general, the corporate VC groups that have been in business for more than five years have continued to remain supportive of companies meeting their plan," said Jim Breyer, a venture capitalist at Accel Partners, which has backed many tech companies, such as Actuate (ACTU: news, chart, profile), Agile Software (AGIL: news, chart, profile), RealNetworks (RNWK: news, chart, profile), Foundry Networks(FDRY: news, chart, profile) and Walmart.com. "We're seeing budget pullbacks" from corporate programs developed over the past few years, Breyer said.
Due to this declining participation from corporate VCs, there is "more emphasis to continue to fund the life cycle" of the portfolio companies, Breyer said.
"VCs are more conscious about what to spend," said Howard Cox, who joined VC company Greylock in 1971. "I believe there are less deals because a number of entrepreneurs are more cautious."
Indeed, the climate remains challenging for those thinking about how to create a company.
"My trip to Southeast Asia was too short," said Bill Demas, a former executive vice president at Vividence, a privately held company that measures customer experience on the Internet. Demas left his company four months ago and thought he'd return to better and brighter days.
Instead, he returned to see his shares of Microsoft (MSFT: news, chart, profile) lower and an environment that was in tatters. "I thought the archeological ruins in Angkor Wat were bad."
After assessing the market, Demas, who is looking for a CEO position in a pre-VC invested company, knows the way to endure this environment is to buckle down and prepare how to operate with very little capital.
He also knows that unlike the heyday, when customers were an afterthought to a venture, finding a customer willing to buy a product is the first step.
Then it's on to raising money. And at this time, he's scaling back his expectations to levels not felt since well over a decade ago. He's not alone.
"This feels like the late '80s," said Breyer, referring to the '87 crash and the subsequent rise of prudence that followed. "There is caution on new investments and investments in existing portfolios," he said.
Software attracted the most dollars, with $1.1 billion invested, followed by the networking and biotech industries. The telecom industry managed to receive $722 million, just slightly below what was invested in the biotech industry.
But Breyer isn't expecting private investing in the technology sector to thrive this year. To this end, start-ups need to be realistic about the long gestation period.
"When I joined in 1987, the analysis we used was that a 10 to 20 times earnings multiple four years out was an appropriate way to do an early analysis," said Breyer. This analysis is appropriate in the current environment. See related Net Sense: Anemic growth doesn't justify tech prices.
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