Despite the dramatic drop in the public markets and the slamming shut of the initial public offering window, many venture capitalists insist now is as good a time as any to be investing in developing companies. The turbulent market conditions have made company valuations more reasonable and imposed a return to VC investing fundamentals, including a renewed emphasis on due diligence and a slower investment pace, VCs say. While it remains to be seen if this is a true reflection of the current state of the venture market or, rather, some kind of market wide effort at self-deception, it is true that the pace of venture investing in the computer hardware/software sector has slowed precipitously through the first quarter of this year.
According to preliminary data from our VentureXpert database, VCs invested $2.39 billion in 200 hardware/software companies over the firt three months of this year. This represents a sizeable fall-off in venture activity from the same time period a year ago, when 400 companies, exactly twice as many enterprises, received more than twice as much – $4.8 billion ? in private financing. However, despite the slower pace during the first quarter, the average investment size for Q1 2001 is actually slightly larger than Q1 2000. Companies receiving funding during the first quarter of this year averaged $11.97 million, while companies left the negotiating table last year with an average of $11.89 million ? numbers which appear to support VCs? contention that while the venture market may be cooling off and eliminating the froth, solid companies will continue to find the funding they need to grow.
“The bar has been raised?.the trend is that only the best companies are getting funded,” said Matthew Cowan, a general partner at Bowman Capital. “However, in comparison to other sectors, some of which have gone close to zero funding, I do think the software sector is continuing to do well in terms of VC investment.”
Leading the list of fund raising successes for Q1 was PacketVideo Corp. The wireless multimedia software company closed on a $100 million in March from a syndicate of 19 investors, including Intel Capital, QUALCOMM Ventures, Sonera Corporate Venture Capital Program, Texas Instruments Inc. and Sun Microsystems Inc. Other first-class first-quarter fundraisers included online payment company PayPal, which closed a $90 million round of funding and Bowman portfolio company Epicentric Inc., a next-generation Internet and intranet portal infrastructure software & services company that received $40 million in a Series D round led by J. & W. Seligman & Co. Inc.
March proved to be the most lucrative month to close a deal, as 82 companies split $1.10 billion for an average of $13.44 million per company. January came next, as VCs invested a total of $748.93 million into 59 companies for an average of $12.69 per company. February rounds out the list with 59 companies divvying up $543.72 million in venture financing for an average of only $9.22 million per company.
Contact Alistair Christopher.