A common refrain at venture capital industry conferences has been that the investment climate is not nearly as strong as it was in 1999 and 2000. At future gatherings, the year 1998 will likely be added to the list.
According to second quarter disbursement figures released today, fewer U.S.-based private companies received venture capital backing than in any other quarter since Q3 1997. The 819 companies that received funding between April and June of this year is just slightly lower than 825 companies that netted cash in the first quarter, but is off over 63% from its high water mark of 2,253 companies in the spring in 2000.
The total amount of capital disbursed was also lower for the ninth consecutive quarter. Venture capitalists invested approximately $5.7 billion in Q2 2002, an 11% drop from the $6.41 billion raised during the previous three-month period. The average deal size decreased from $7.79 million in Q1 down to $6.98 million in Q2, while the average post-money valuation fell from $39.18 million in Q1 to $35.38 million in Q2.
“I doubt that [deal sizes or valuations] have bottomed out,” says Tom Crotty, a general partner with Wellesley, Mass.-based Battery Ventures. “Capital efficiency is the name of the game, and we’ve gone back to the models we used to implement… but the market hasn’t completely transitioned out of its bubble mindset.”
When Winners Are Losers
There is no better poster child for the Q2 swoon that Mahi Networks Inc., an optical switch developer that netted the quarter’s largest deal.
On the surface, it would appear that the Petaluma, Calif.-based company was a rare success story in that it wrangled $75 million from tight-fisted investors for its Series D offering. The problem, however, was that the term sheet Mahi signed represented a drastic valuation reduction from the more than $180 million it was worth after its second round deal. Bill Cadogan, a general partner with St. Paul Venture Capital, in June told Private Equity Week that his firm and other new investors bought into Mahi at a pre-money valuation of just $1 million. Early-stage backers like Benchmark Capital, G.E. Capital, Goldman Sachs and Sequoia Capital got washed out.
Next on the list of top Q2 capital recipients was Infinity Pharmaceuticals Inc., a Boston-based drug discovery company that netted $70 million in a deal led by Advent International. Other top venture capital raisers included health document processor Smart Corp. with a $50 million take, optical switch and router producer Movaz Networks Inc. with $49 million and biopharmaceutical developer Barrier Therapeutics Inc. with $46 million.
Overall, the information technology sector maintained its usual dominance by securing 65% of all venture capital investments in Q2. Continuing to gain ground, however, was the life sciences space with 28% of the market. Over the previous five quarters, life sciences investments had only comprised 16% of venture disbursements. In addition, life sciences investments averaged $8.53 million per deal, compared to $6.63 million for IT deals and $4 million for non-high tech deals.
“I think people realize that you can make money and feel good about what your companies are trying to do when you invest in health care,” says Wyc Grousbeck, a general partner with Lexington, Mass.-based Highland Capital Partners. “Highland has historically invested about one-third of its funds into health care, so 28% seems like a good place for the market to be.”
Straight To The Source
The most active venture investor during the second quarter was Baltimore-based New Enterprise Associates (NEA) which invested $115.88 million in 20 deals. Among the new NEA investments were stakes in T-RAM Inc. and DeCru Inc., while it also funded follow-on offerings for such portfolio companies as Xcel Pharmaceuticals Inc. and Confluence Networks Inc.
Other big spenders included Menlo Ventures with $64.84 million into 11 deals, Polaris Venture Partners pumping $60.09 million into 13 companies, Warburg Pincus at $59.52 million for 14 deals and St. Paul Venture Capital investing $53.37 into 12 companies, including Mahi Networks.
The investment figures used in this story come from data compiled by the PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey.
Contact Dan Primack
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