Posted on: Tuesday, October 26, 2004
Venture capitalism lags in 3rd quarter
BY Michael Liedtke
Associated Press
SAN FRANCISCO — Venture capitalists curtailed their investments in the third quarter, suggesting the financiers who bankrolled the dot-com boom are taking a more sober approach to the revived interest in high-tech startups.
A total of $4.33 billion poured into 601 deals nationwide during the three months ended in September, according to data to be released today from the National Venture Capital Association, Thomson Venture Economics and PricewaterhouseCoopers.
The amount was virtually unchanged from the same time a year ago, but represented a slowdown from venture capitalists' recent pace. In the previous nine months, venture capitalists had invested an average of $5.46 billion per quarter, including $5.87 billion in the April-June period.
Industry observers attributed the third-quarter decline to a normal summer slowdown, as well as to the lessons venture capitalists learned from the devastating bust that occurred in 2001 and 2002 when hundreds of tech startups collapsed.
"The lower level of activity ... is not concerning," said Mark Heeson, president of the National Venture Capital Association. "To be frank, a 25 percent increase in venture investment would be more alarming. The industry is setting its own pace, with no pressure to accelerate investment or pour dollars into hot areas."
Paul Vais of Apax Partners also is encouraged by the recent trends.
"The market is pretty healthy," he said. "I don't think (the third quarter) represents any kind of megatrend. It's just a normal seasonal deviation and people being picky about what they invest in."
Even with the summer drop-off, venture capitalists remained on track to invest more money than they did in 2003. Through the first nine months, venture capitalists had put $15.31 billion into 2,079 deals, up from $13.31 billion in 2,081 deals at the same time last year.
If that pace continues, it will mark the first annual increase in venture capital investment since 2000 when the industry poured $106 billion into nearly 8,100 deals.
A voracious appetite for high-tech stocks during that period propelled the furious pace of venture capital investment back then. Venture capitalists tightened their purse strings after the stock market lost its taste for the initial public offerings of tech startups, but there have been signs investors are hungry again.
Several high-tech stocks have performed well after completing IPOs earlier this year, with online search engine leader Google Inc. providing the most prominent example. The Mountain View-based company priced its IPO at $85 per share in August, raising $1.67 billion. The shares have soared since, closing at $187.40 yesterday.
Dave Furneaux, a managing general partner with Kodiak Venture Partners, said Google's performance proves that it still pays to take investment risks in hopes of hitting "the long ball. It's nice to see validation in the marketplace on such a grand scale. It probably rejuvenates the industry a bit, but I think we are still rooted in reality."
Despite the restraint shown during the third quarter, some venture capitalists remain worried that the industry will get carried away again.
"We are in a more euphoric stage than 18 months ago," said Promod Haque, managing general partner with Norwest Venture Partners. "There needs to be a lot of discipline exercised by venture capitalists."
