Survey Says: Venture Spending Lags Again

VC spending for the second quarter of 2002 remained in the doldrums with $5.7 billion invested, down from $6.4 billion last quarter, according to the newly released MoneyTree survey.

Software remained the largest single category for VC spending, garnering $1 billion in the quarter, but that is a 16 percent decrease from the $1.2 billion garnered in the first quarter, according to numbers tabulated by the lengthily-named PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey. Rival VentureOne/Ernst and Young numbers showed venture investments slipping to $5.1 billion this quarter from $5.5 billion for the first quarter.

Biotech was something of a bright spot amid an otherwise dreary landscape, according to the MoneyTree research. That category collected $958 million, up 15 percent from the $836 million invested last quarter.

"Biotech and life science was the good news. The rest was in the tank. Or to be more politically correct, the rest is back to 1998 levels," said Kirk Walden, national director of venture capital research at PricewaterhouseCoopers.

Walden and others behind the survey were quick to point out that a return to 1997-1998 levels of spending is not the end of the world. The peak in VC spending by far was the first quarter of 2001, when $29.5 billion was invested. If the current spending trends continue until years' end, the analysts predict that $109 billion in venture money will be invested for the calendar year, the fourth-highest amount since the figures have been tracked.

In terms of first-round deals, a fairly good gauge of how willing VCs are to take a chance on a new company, 207 launched in the second quarter, up from 196 for the previous quarter. "That's kind of comforting," Walden said. Some 2459 companies got first round funding in 1999, compared with 3,342 in 2000 and 1167 last year.

Venture capitalists are driving harder bargains for the money they do invest, demanding larger shares of the target companies and "protecting" current investments.

"VCs are in a double bind. The IPO market is gone and all the stock prices are depressed, so public companies don't have the free cash to acquire [start-ups. The two big exit strategies are an IPO or a sale, so VCs know they have to make some kind of triage decision. Some companies will have to die," Walden said.

Venture capitalists tended to trumpet their triumphs in the go-go years but are not similarly inclined to publicize their failures. Nonetheless, Walden figures "easily hundreds" of VC-backed companies went under last year.

Technology companies with VC backing said the change of atmosphere since 2000 and 2001 could not be more striking. "We were trying to meet with our VCs and they couldn't because of an 'equity event,' which meant that one of their companies was going under," said one executive at a Silicon Valley software company.