SAN FRANCISCO — Investments in venture capital funds plunged 33 percent during last year’s final quarter in a retreat spurred by the accelerating pace of Internet business failures.
Venture capitalists raised $18.4 billion nationwide in the fourth quarter, down from $27.4 billion in the third quarter, according to a report released Thursday by the industry’s trade association and Venture Economics, a research firm.
On a year-to-year comparison, the venture capital slowdown was even more dramatic.
In the fourth quarter of 1999, investors turned over $29.6 billion in venture capital funds.
The deceleration in fund-raising coincided with a similar slowdown in the rate of investments in start-ups.
Venture capitalists invested $19.6 billion during the fourth quarter, a 31 percent decrease from the prior quarter.
Despite the drop-off late in the year, venture capitalists still raised a record $92.3 billion in 2000, a 54 percent increase from the $60 billion collected in 1999.
Of that total, Silicon Valley venture capitalists raised $38.6 billion in 2000, including $10.3 billion during the final three months of the year.
The money raised during 2000 likely will be invested in start-ups and other young companies during the next three to five years.
Venture capitalists agreed the fourth quarter heralded a pivotal shift in sentiment as the market’s key players concluded that a surplus of money encouraged unwise investments in questionable businesses.
The imprudent investing translated into the current dot-com carnage that likely will depress venture capital returns for several quarters.
“There were a lot of businesses getting funded that weren’t really businesses at all. They were really just interesting features on a Web site,” said Alex C. Smith, managing director with Dell Ventures in Texas.
After raising more than $150 billion in the past two years, venture capitalists don’t really need to raise much more money, particularly since the stock market’s appetite for initial public offerings of young companies has waned.
Venture capitalists depend on IPOs to liquidate their investments in start-ups.
One major Silicon Valley firm, Crosspoint Venture Partners, abandoned plans to raise $1 billion during the fourth quarter after concluding that the stock market’s demand for technology investments is unlikely to rebound soon.
The institutional investors who provide funds to venture capitalists also have been spooked by the dot-com carnage, which only recently has stated to have an impact on returns.
Emboldened by quarterly returns that peaked at 59 percent in 1999, institutional investors began to boost their allotment for venture capital from 1 percent to 2 percent of assets, said Gregory Sands, managing director for Sutter Hill Ventures in Palo Alto. Now, those institutional investors are retrenching.
“The last two years really were aberrations. It feels like we are going to go back to more normal levels of investment,” Sands said.
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