US venture capital looks up

US venture capital ended 2003 on a positive note in Q4 2003 with investments totaling $4.9bn in 679 companies, according to the PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey. This figure is up from $4.4bn in Q3 2003 and is the highest amount invested since Q2 2002, when the total reached $6bn. For the full year investments totaled $18.2bn in 2,715 companies. The 15% decline from $21.4bn in 2002 was small compared to decreases over the last three years.

In terms of sectors, biotechnology was the leading industry category, outpacing software, which accounted for $978m in Q4. For full year 2003, the life sciences sector (biotechnology and medical devices) attracted $4.89bn, or 27% of all venture capital. This represents the highest proportion directed to life sciences in the last 12 years.

The largest industry category was software, taking $3.6bn in 2003, accounting for 20% of the total amount invested. It was followed closely by biotechnology at $3.4bn. Telecommunications fell to $2bn, or 11% of all investing, and networking dropped to $1.7bn, or 9% of the total in 2003. At their historical peaks, telecommunications accounted for as much as 17% of total venture capital investments and networking accounted for 14%. Semiconductor investing held steady at $1.2bn, or 6% of 2003 investing.

By investment stage there was a marked shift toward later stage investing in 2003 as existing portfolio companies matured. Later stage investing in Q4 2003 reached $1.5bn, the highest level in two years. And for the full year later stage investments totaled $4.7bn, accounting for 26% of all venture capital. This is the highest percentage of later stage investing in at least 20 years.

Investing in early stage companies slowed. In Q4 2003 a total of 166 early stage companies attracted $789m. That figure compares to 184 companies and $846m in Q3 2003. For the full year 716 early stage companies received funding worth $3.3bn. All figures were down marginally from 2002.

Jesse Reyes, vice president at Thomson Venture Economics, said: “Despite the triage seen in the last two years, venture capitalists’ portfolios are still bulging with existing companies even as they continue to add new early stage companies. Exits are the release valve, but it will take considerable time to work down that inventory. In the meantime, more and more portfolio companies that are now in the expansion stage will naturally mature to later stages of development, and they’ll require additional rounds of funding to continue operating. We expect later stage investing to retain this degree of prominence for the next year or longer.”