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US venture investors remain cautious

Venture capital investments in the US are still on a downward spiral with total investments for the third quarter of 2002 down 26 per cent from the previous quarter to $4.5 billion. This is a return to the investment levels of pre-1998.

According to the PricewaterhouseCoopers/Thomson Financial Venture Economics/National Venture Capital Association MoneyTree Survey VCs invested $6 billion in

Q2 2002 and $6.4 billion in Q1 2002. A total of 647 companies received funding compared to 838 in the previous quarter.

Investment pace has slowed dramatically over the last 18 months due to continued volatility and poor performance in the public markets, as well as the decline in corporate technology spending. VCs have become increasingly selective as they are faced with longer investment cycles, declines in company valuations and limited exit opportunities, reveals the survey.

All major industries experienced declines. Software, traditionally the leading industry category showed some resilience in dropping only 10 per cent from the prior quarter to $993 million in 180 deals, accounting for 22 per cent of all venture capital. Telecommunications, the second largest category continued to struggle falling 32 per cent to $555 million in

67 companies. Following a solid round of quarterly investments, the life sciences industries have also experienced a dry patch with biotech declining 52 per cent to $468 million in 48 companies and medical devices down 28 per cent to $448 million.

By stage, expansion continues to receive the most funding, accounting for 56 per cent of total capital invested and 55 per cent of the number of deals in Q3. Later stage investing became more dominant representing 20 per cent by value

and 15 per cent by volume compared to 13 per cent (value) and nine per cent (volume) in Q2.

VCs have concerns regarding the front-end and back-end

of the deals they are evaluating, says Mark Heeson president of the NVCA. “On the front-end, they are concerned that young companies are going to have difficulty gaining traction in terms of customers and revenues due to the decline in technology spending. On the back-end, they are concerned about sobering valuations and illiquidity. Both sets of concerns are resulting in an increasingly cautious venture community,” he said.