Software Deals Stay On Course After Sept. 11

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

The investment pace rivals the two months previous to the attacks, and considering the occasional lag in the reported data, VCs may yet prove to have actually increased their activity post-Sept. 11.

“I?m sure the dotcom implosion hurt them [start-ups] a whole lot more than this [Sept. 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 $950.7 million in 95 software companies, according to VentureXpert. During the two-month period ending Sept. 10, 138 start-ups claimed $1.06 billion. As it stands, that represents only a 10% decline.

Taking the entire venture market into account, VCs invested $4.03 billion in 382 companies during the two-month period after the attacks.

Despite all the hype about security investments and data back-up firms, 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 back-up 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 before the attacks. 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 short a time 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 has also talked to a security company in Atlanta that?s been getting more interest lately, and eVault has been getting more attention itself.

However, he did warn 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.”

For the entire year through Nov. 10, investors have supported 630 companies in the computer software sector 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 to go in 2001, investments in the computer 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 fairly well.

Charles Fellers can be contacted at: