VC Spending Slump Persists

For the first quarter of 2002, VCs invested $6.2 billion in 786 deals, down for the seventh consecutive quarter since the record high $29 billion invested in the first quarter of 2000, according to numbers compiled by PricewaterhouseCoopers/Venture Economics/National Venture Capital Association (NVCA).

For the fourth quarter of 2001, $8.1 billion in venture capital was divided up among 994 deals, according to the survey.

That first-quarter figure is roughly comparable to the late-1998 VC totals logged before the Internet boom and bust. "We are now running at about a fourth or fifth of the peak period," said John Taylor, vice president of the NVCA. "This is a steady downward trend that started with the peak," he said.

The consolidation of research by these groups led to a restating of previous numbers as well.

The huge software sector was hit hard, with spending down 44 percent to $1.1 billion sequentially, according to the survey. Telecom spending was down 40 percent to $720 million. On the somewhat brighter side, the huge networking sector valued at $900 million was down just 7 percent, said Kirk Walden, national director of PricewaterhouseCoopers' Venture Capital Research Group.

VC spending continues to be rattled by the same reverberations affecting the public markets, including the overcapacity of networking infrastructure that has slammed carriers and networking companies. "Many companies wonder, 'Why make this more efficient when I'm not using the capacity I have to begin with?' " Walden said.

Jim Breyer, general partner at Accel Partners, a Palo Alto, Calif., VC firm, found some hopeful signs, however.

Young companies have gotten smarter about business models and reined in spending, Breyer said. In telecommunications and netwroking, in particular, companies that had relied on debt to build their services business have curtailed that practice, he said.

"Companies are building proprietary, defensible technologies and not [necessarily expecting spending in the sector to increase," Breyer said.

He also said VCs are seeing more qualified entrepreneurs than in the past. "There's no doubt that entrepreneurs are starting businesses for the right reasons. They're not thinking of the one- to two-year type of flip, they're going to spend five to seven years building," he said.

Howard Cox, a general partner at Greylock Partners, Waltham, concurred. "Values are generally built over long periods of time. Historically, it's taken seven years from initial investment to IPO. We're just back to the more historic nature of the business," he said.