Venture Capitalists Regain Confidence In Start-Up Firms
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By ANN GRIMES
Staff Reporter of THE WALL STREET JOURNAL
July 27, 2004; Page C1
Venture capitalists are slowly getting their groove back.
Since last summer, funding for the youngest start-up businesses has remained essentially flat "despite anecdotal buzz of a resurgence," industry analysts have said. Now, figures for the second quarter show that the upbeat anecdotes are becoming reality, albeit gradually.
Seed and early stage companies accounted for 36.8% of all companies funded in the second quarter, a level not seen since the nasty technology downturn began in the first quarter of 2001, according to the PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey set for release today.
Overall, venture investing rose to $5.6 billion during the second quarter from $5 billion in the first quarter of 2004, the study found. Year to year, investment was up 19% from $4.7 billion. The number of deals also rose to 761 in the second quarter, up from 686 in the first quarter of the year and up from 727 in the second quarter of last year.
But it's the uptick in early stage investments that has industry experts saying the venture-capital industry has started to move past the wicked fallout from the tech-sector collapse. While investment activity ticks up, the venture industry continues to grapple with three-year double-digit negative returns. One-year returns, however, have turned positive with the improved market for initial public offerings.
On a percentage basis, the signs of activity in seed and early stage investing are positive, with investment activity rising to 36.8% from 33% the quarter before. In dollar terms, funding rose about 34%, quarter to quarter. Year to year, the number of investments in seed and early stage companies remained about the same, but funding in dollar terms rose 19%. Historically, the activity is off from the high seen in the fourth quarter of 1995, when 50.7% of funding went to seed and early stage companies. But it is well above the low of 28.5% for seed and early stage deals reached in the fourth quarter of 2001, according to the MoneyTree data.
Meanwhile, the number of later-stage deals -- funding for the most mature young companies -- stayed flat for the quarter at about 18%. Funding for start-ups in that category has risen steadily from a low of 7.7% in the second quarter of 2000 to a high of 20.6% in the fourth quarter of 2003, the data show. "The industry seems to have worked its way through the later-stage companies funded in 1999 and 2000 and is now turning its attention to a crop of new technologies," says John S. Taylor, the vice president of research for the NVCA.
Analysts attribute much of the new activity to the fact that venture firms have raised new funds and begun to invest them.
"It's not surprising to me that the early stage investments are starting to accelerate," says Steve Baloff, a general partner with Advanced Technology Ventures, a venture firm based in Palo Alto, Calif., and Waltham, Mass. Over the past six months, many venture firms have raised new funds and they have begun to deploy that capital into new start-ups, he says. At the same time, firms investing the last of their capital into later-stage deals have reached the end of those investment cycles, he says.
In the aggregate, 229 early stage companies and 51 "seed" companies were funded during the second quarter, receiving $1.9 billion, or 22% of the quarter's investment, the highest in seven quarters. In the first quarter of the year, 193 early stage and 39 "seed" companies attracted $932 million. By comparison, 2,894 early stage and 670 seed companies that commandeered $29 billion in 2000 during the tech boom, or 43% of the deal flow that year.
Heartening to Silicon Valley, software remained the largest industry sector, with 212 companies attracting $1.2 billion for the second quarter, the MoneyTree survey found. Forty-four networking companies raised $459 million, mostly in follow-on rounds; 59 telecommunications companies raised $518 million. "When I look at deals being done in this area, people are still looking at the remnants of the Internet as the strongest part of the [information technology] community," says Jesse Reyes, a research analyst at Thomson Venture Economics.
The life-sciences sector, which includes biotechnology and medical devices, continued to remain near historical highs, as it has for the past eight quarters. Investments in that sector totaled $1.41 billion, or 25% of the quarter's venture capital. However, investments fell in biotechnology companies, which has led investment dollars since the downturn. Analysts called it a blip, not a trend. Eighty-five biotech companies attracted $923 million, down from the $968 million that went into 77 biotech companies in the first quarter of 2004.
Meanwhile, funding for 70 medical-device companies jumped 40% to $485 million; that compares with the $344 million that went to 56 companies in the first quarter of the year. "Life sciences continue to garner a significant amount of money and I don't see that changing," said Mark Heesen, president of the National Venture Capital Association.
One new area that saw an uptick in investing was media and entertainment, led by two very large deals: $60 million for Sí TV, a Latin-theme cable television network, and $70 million for online publisher TechTarget.com, of Needham, Mass.
The investment trends were similar among early stage companies. Seventy-nine software companies raised $326.7 million, followed by 35 biotech companies, which raised $252 million. The telecom sector pulled in $133 million. Seventeen semiconductor companies raised $104 million, followed by 29 medical device companies which raised $102 million.
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