VC Funding Decline Levels Off In 4Q

Jan 27, 2003 (07:01 PM EST)

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The downward spiral of venture-capital funding seems to have leveled off in the last quarter of 2002.

Investments in startup companies totaled $4.2 billion for the last three months of the year, according to the quarterly Money Tree survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. In the third quarter, investments were $4.5 billion, a sharp decline from the $6 billion invested in the second quarter.

Reflecting a note of optimism, a total of 692 companies received funding last quarter, compared with 671 companies in the third quarter. That number is more significant, venture capitalists say, because it shows that investors are taking risks on more companies, just not with as much cash up front since exit opportunities--selling a company or having it go public and regaining the investment--aren't immediately attainable. "VCs are giving smaller amounts of money up front to see how a company does in a year, and then would put more money into it," says Bill Elmore, general partner of Foundation Capital. "We are more risk averse and looking deeper for a proof of business model. Don't mistake patience for pessimism."

As usual, software companies received the bulk of the money and investment deals because of low initial investment requirements and sector diversity, though investment levels in the sector continued to decline, according to Tracy Lefteroff, global managing partner of the VC practice at PricewaterhouseCoopers. For the fourth quarter, the sector saw $869 million in funding, compared with $1.04 billion in the previous quarter. Telecommunications and networking companies received $562 million and $468 million, respectively, compared with $641 million and $347 million in the third quarter.

For the full year, venture investing totaled $21.2 billion, approximately half of 2001's $41.3 billion and closely matching the $21.6 billion that went to new companies in 1998, before the economic bubble. The software industry saw 799 deals totaling $4.3 billion, or 20% of all venture investing. Telecommunications had 335 deals totaling $2.9 billion, or 14% of the total. Investments in networking fell to $2.2 billion in 209 companies, 11% of the total amount invested.