Venture capital investment plunges

The Associated Press
Tuesday July 31, 2001

SAN FRANCISCO — Continuing to spurn once-irresistible Internet entrepreneurs, venture capitalists invested $10.6 billion in start-ups during the second quarter, a 61 percent drop from the same time last year, according to industry statistics released Monday. 

The investment community’s deepening disillusionment with the much-vaunted New Economy accounted for the dramatic turnaround from last year’s second quarter when venture capitalists invested $27.2 billion, according to the research firm Venture Economics and the National Venture Capital Association, an industry trade group. 

Of last year’s total, more than one-third of the venture capital money, $9.3 billion, went to start-ups whose business plans hinged on the Word Wide Web. In this year’s second quarter, Internet start-ups attracted $3 billion in venture capital, a 68 percent decline from last year. 

Venture capitalists’ flight from the Internet deflated Northern California’s Silicon Valley – ground zero for the New Economy. Venture capital investment in Northern California plummeted 66 percent from $9.28 billion last year to $3.14 billion in this year’s second quarter. 

As Internet companies fell out of favor, biotechnology became more alluring to venture capitalists. Start-ups focused on medical sciences, health and biotechnology received $1.47 billion in venture capital in this year’s second quarter, a 37 percent increase from the $1.07 billion invested a year ago. 

The growing fascination with genomics and other promising biotechnology fields hasn’t been enough to keep venture capitalists out of the same funk dragging down the entire technology industry. 

“This is the most difficult environment I have experienced in my entire career,” said New Enterprise Associates general partner Tom McConnell, a Silicon Valley venture capitalist since 1985. 

Besides nursing their portfolio of ailing companies, venture capitalists also face the challenge of finding suitable investments for the remaining $40 billion that they raised from pension funds and colleges in the last year. 

“Some of these venture capitalists are in between a rock and a hard place,” said Bill Hutchison, global director of technology for Andersen Business Consulting. “Their investors don’t want the money to sit around doing nothing, but on the other hand, they don’t want the money to go into things that aren’t going to make a cent.” 

Venture capital investments have been dwindling since hitting a peak of $28.6 billion in last year’s third quarter and most people in the industry expect the trend to last at least through the rest of this year and perhaps even through 2002. 

Even so, 2001 still will rank among the venture capital industry’s biggest investment sprees. Through the first half of the year, venture capitalists had invested $22.8 billion, more than any other entire year besides 1999 and 2000. Enticed by the Internet mania, venture capitalists invested $58.8 billion in 1999 followed by $103.3 billion last year. 

Some of those recent investments, though, are coming back to haunt venture capitalists as the market values of unprofitable dot-coms plunged. Accustomed to annual investment returns of at least 20 percent, the average venture capital firm suffered a 6.7 percent loss in the one-year period ending March 31, the worst performance in the industry’s history. 

Despite the recent jitters, venture capitalists are still financing new ideas. During the second quarter, venture capitalists invested $1.4 billion in 142 “early stage” companies, the industry’s shorthand for start-ups that hadn’t previously raised any venture capital. That represented a 44 percent decline from the $2.5 billion invested in 232 early stage start-ups at the same time last year, according to Venture Economics. 

“There is a misconception that that the spigot has been completely turned off. We have just turned down the flow a bit,” said Jesse Reyes, a Venture Economics vice president. 


On The Net: 

National Venture Capital Association: http://www.nvca.org