SAN FRANCISCO — Mirroring the technology industry meltdown, venture capital investments and fundraising continued to evaporate in the third quarter, dissolving hopes for a turnaround early next year, an industry report said Monday.
Venture capitalists invested $7.7 billion in start-ups in the three months ended Sept. 30, a 73 percent plunge from the same time last year when the industry reached its quarterly high-water mark of $28.5 billion, according to statistics compiled by industry research firm Venture Economics for the National Venture Capital Association.
It marked the industry’s lowest investment amount since the first quarter of 1999, when start-ups received $7.2 billion.
The about-face has been especially dramatic in Northern California, the Silicon Valley home of the nation’s most prominent venture capitalists. Northern California start-ups received $2.36 billion in the third quarter, down from about $10 billion a year ago.
This year’s steep decline stems largely from the frenetic pace of venture capital investment in 1999 and 2000. During the previous two years, venture capitalists invested $161 billion as they chased after stock market jackpots. Despite the drastic slowdown, 2001 still will represent the venture capital industry’s third-largest investment year.
But with the level of investment falling for the fourth consecutive quarter, venture capitalists are becoming increasingly somber as they gird for even more erosion in the months ahead.
Most venture capitalists don’t expect the industry to bounce back for another 12 to 18 months, said John Taylor, research director for the National Venture Capital Association, the industry’s main trade group.
“Anyone expecting a quick turnaround is sadly mistaken,” said Jim Breyer, managing partner with Accel Partners, a major venture capital firm in Palo Alto.
In another sign of the industry’s retrenchment, venture capitalists raised $6.2 billion for future investments during the third quarter, a 78 percent decline from the $27.6 billion collected at the same time last year. It represented the lowest amount of venture capital raised since the third quarter of 1997, when $2.6 billion trickled in to the industry.
Venture capitalists aren’t raising more money largely because they still have so much left over from last year, when institutional investors and other money managers turned over $106.8 billion to the industry.
Venture capitalists still have an estimated $45 billion to $50 billion remaining from their past fundraising efforts, Taylor said.
With the stock market turning a cold shoulder to tech companies, venture capitalists are spending most of their time and money nursing their existing investments. The triage is forcing venture capitalists to impose harsh expense reductions that frequently include layoffs, a process that is “emotionally difficult,” said Howard Cox, a general partner with Greylock Financial in Boston.
“One of the new roles venture capitalists are taking on today is as outplacement (specialists) helping the former employees at their portfolio companies find new jobs,” Cox said.
Venture capitalists also are expected to fall by the wayside if the technology industry’s carnage continues, as most analysts predict.
“There will be a significant shakeout in the venture capital business, just as there already has been a significant shakeout in the companies that we have invested in,” Breyer predicted.
Spooked by a slump that already has saddled the industry with its worst losses ever, venture capitalists are throttling back on their technology investments. Internet businesses accounted for 27 percent of the venture capital invested in the third quarter, down from 46 percent of investments last year, according to Venture Economics.
Meanwhile, venture capitalists are becoming more intrigued with start-ups involved in biotechnology and medical products.
These “life sciences” companies received 14 percent of venture capital in the third quarter, up from roughly 7 percent last year