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US investment falls to pre-bubble level

Venture capital investment in the US declined in the first quarter of 2002. Investments fell 24 per cent to $6.2 billion, compared to the previous quarter when 994 companies were funded. The funding of 787 companies represents a drop to 1998 levels, according to the Pricewaterhouse Coopers/Venture Economics/NVCA Moneytree survey. Mark Heeson, president of the National Venture Capital Association, said: “The venture capital industry is cyclical, and it’s important to put today’s environment into perspective.”

Early stage investments were up on the end of last year, receiving 19 per cent of the money invested (26 per cent of the total number of deals) compared to 16 per cent and 23 per cent last year. First time financings also rose to 24 per cent of deals and 20 per cent of dollars invested, compared to 22 per cent and 15 per cent for Q4 2001. Jesse Reyes, vice president of Venture Economics, said: “It is encouraging to see that what new investment is being made is being made in early stage companies. It’s a positive indicator that VCs are willing to take on more risk than they did in prior quarters.”

Sectors showing a drop in investments included software ($1.1 billion), networking ($899 million), biotechnology ($752) and telecommunications ($722 million). Commitments to the IT services sector declined the most, falling 45 per cent to $235 million. Investments in media and entertainment, computers and peripherals and electronics & instrumentation rose respectively by 22 per cent to $371 million, 48 per cent to $192 million and 70 per cent to $153 million. Medical devices and semiconductors remained stable at $409 million each.

Tracy Lefteroff, global managing partner of PwC’s VC practice, said the public markets were disappointing in the first quarter. “On the private side, the pipeline is clogged with venture-backed technology companies ready for public financing. A sustained recovery is unlikely until technology spending by corporations increases and liquidity options improve,” he added. Reyes said time to exit is lengthening and venture capital firms now face a dilemma over whether to keep supporting their portfolio firms with follow-on rounds or make new investments.