Computer Software Wrap: Business Continues at Usual Pace Post-9/11

In the two months following the Sept. 11 attacks, venture capitalists have invested almost $1 billion in computer software companies.

The investment pace rivals the two months previous to the attack, and considering the occasional lag in the reported data, VCs may yet prove to have actually increased their activity after the attacks.

“I’m sure the dotcom implosion hurt them [start-ups] a whole lot more than this [9/11],” said Burt Alimansky, chairman of New York Business Forums Inc. and managing director of Alimansky Capital Group Inc.

Indeed between Sept. 11 and Nov. 10, VCs invested $949.7 million in 94 portfolio companies, according to our VentureXpert database. During the two-month period ending Sept. 10, 137 start-ups claimed $1.06 billion. As it stands, that only represents a 10% decline.

Taking the entire venture market into account, VCs invested $4.01 billion in 380 companies during the two-month period after the attacks.

Despite all the hype about security investments and data backup companies, VCs actually invested less in those companies since the attacks. Comparing the period since the attack to the previous two months, investments in companies specializing in security, firewalls and encryption dropped to $41.3 million from $60.4 million.

Furthermore, the only reported investment into backup and disaster recovery companies since Sept. 11 came when River Cities Capital Fund III LP invested about $1.5 million in eVault Inc. in October. However, that investment was actually committed in August.

In August, eVault closed an $8.5 million round, but River Cities holds an SBIC license and the SBIC part of the investment was delayed. However, two months may be too soon for presentations and due diligence to work their magic and close deals.

“We have to say that the attention to those sectors have increased,” said Ed McCarthy, the principal at River Cities Capital Funds who worked on the deal. He said he’s also talked to a security company in Atlanta that’s been getting more interest lately, but he warned against blindly jumping on the bandwagon.

“You always have to be a little careful [when sectors get this kind of attention],” McCarthy continued. “Do you remember when cold fusion got all that attention? I must have had nine people call me within a month of the cold fusion hoopla with some kind of deal.”

Also in August, VCs blessed data-storage start-up Rhapsody Networks Inc. with $50 million but, so far, no deals have been reported since the attack in the backup and disaster recovery sector.

For the entire year through Nov. 10, investors have supported 629 companies in the computer software with $6.79 billion. That investment accounts for 19% of the overall VC market, and the sector looks to turn in a reasonable year.

With two months left in the year, investments in the compute software sector have already reached at least 45% of the $15.13 billion mark that VCs contributed to the sector in 2000. Furthermore, compared to 1999’s $7.53 billion and 1998’s $3.87 billion, investments in computer software companies appear to have held up pretty well.

Charles Fellers can be contacted at Charles.Fellers@tfn.com

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