Venture capitalists remain wary of new risks
By Michael Liedtke
Associated Press
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Venture capitalists invested $4.48 billion in startups during the period ending Sept. 30, the weakest quarter since the first three months of 1998, according to a survey compiled by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association.
This year's third quarter represented a 48 percent decrease from the same time last year, when venture capitalists poured $8.68 billion into startups, the report said.
It also marked the ninth consecutive quarter in which venture capitalists curtailed their investments from the preceding three-month period.
The reasons for the downturn have remained largely unchanged since the Internet gold rush turned into a financial bloodbath during the spring of 2000.
As the stock market began to turn a cold shoulder to dot-coms and other high-tech businesses, venture capitalists found themselves stuck with unprofitable startups that no one else wanted.
Meanwhile, even promising startups are finding it increasingly difficult to find customers interested in spending heavily on technology, further reducing their chances of survival and saddling venture capitalists with the worst losses in the industry's history.
"We all have had a very cold shower," said Bob Grady, a venture capitalist with the Carlyle Group.
Most venture capitalists and analysts believe the industry's investments will dwindle even more in the next few quarters.
"We haven't seen the end of the decline," said Robert "Robin" Bellas, a general partner with Morganthaler Ventures. "My gut feeling is that this won't stop until we get down to $2.5 billion to $3 billion per quarter."
Venture capitalists have responded to the adversity by shoveling more money into the best startups in their existing portfolios and investing less in new opportunities.
The number of startups that received their first infusion of venture capital during the third quarter totaled 159, the lowest number in nearly eight years, according to the report.
Back in the heyday of dot-coms in late 1999 and early 2000, nearly 1,000 startups per quarter were getting their first dose of venture capital.
"Caution certainly seems to be the word of the day," said John Taylor, research director for the National Venture Capital Association.
The wariness is causing venture capitalists to shy away from the industry's traditional high-tech stronghold.
Information technology startups attracted 59 percent of the venture capital during the third quarter, down from the industry's historical average of 70 percent, Taylor said.
In the high-tech sector, venture capitalists are focusing more on software startups, which typically burn through less money than hardware companies. Software accounted for 22.2 percent of venture capital investment in this year's third quarter, up from 17.6 percent last year.
