VC Investments Continue Downward Spiral In First Quarter

Leave it to the venture capital industry to disprove the notion that time heals all wounds.

The last time Private Equity Week wrote about quarterly VC disbursement figures was in February, when Q4 2001 data was being released. The gist of the piece was that five quarters of consecutive decline had finally come to a halt. The messianic rebound was at hand, and the sky once again was to be an attainable limit.

According to revised figures being released today, however, it seems that Q4 2001 was actually just another in a series of descending steps. Instead of being up 1.8% over Q3 2001, fourth quarter venture disbursements into U.S.-domiciled companies actually declined by 3.1%.

How did this reversal of fortune happen?

It’s mostly due to the fact that historical data collection is an active process in which tomorrow’s new piece of information may render today’s data run anachronistic. In addition, the revised figures reflect a recent data sharing partnership between PricewaterhouseCoopers and Venture Economics, which doubles as our primary data provider and publisher. The deal was in effect when Q4 2001 numbers came out, but the integration effort was not yet complete. As of today, the data has been fully reconciled.

As part of the VE-PwC agreement, the numbers released do not include private investments into public equity (PIPEs), debt portions of venture deals, nor any portion of buyout financings, even if they are contributed by a venture capital fund. Foreign venture firm commitments into U.S.-based companies are still in the mix.

Q1 2002 Figures

Even if the revised disbursement figures hadn’t cast a pall on Q4 2001, results from the first three months of 2002 would have done the trick.

Total investments fell to $6.2 billion in Q1 2002, a 23.3% decrease from the previous quarter. Moreover, the 787 companies that received venture capital in Q1 2002 represented a 20.8% decline from Q4 2001, and was the lowest number of companies to receive VC backing since the third quarter of 1997.

“The public markets appeared to be recovering late last year, but they were disappointing in the first quarter, especially the IPO market,” said PricewaterhouseCoopers’ Tracy Lefteroff in a prepared statement. “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.”

Venture capitalists are not only waiting for those windows to open until they can exit existing technology investments, but they also seem to be waiting before making new ones. Even though the software sector once again managed to garner more venture capital than any other industry group, its total take of $1.05 billion was a 43% decrease from Q4 2001. Also down significantly were both the IT services sector (-45.6%) and telecom sector (-41%). The only technology niches to see a Q1 up tick were the computers & peripherals sector (+68%) and the electronics & instrumentation group (+59%).

On the other hand, the majority of low-tech sectors realized Q1 2002 gains over their Q4 2001 performances. This included media & entertainment (+18%), business products & services (+18%) and industrial & energy (+36.6%).

Other notable gainers were start-ups looking for their first round of venture funding. Venture capitalists pumped over $1.27 billion into first-round deals in Q1 2002, which stopped seven straight quarters of first-round investment decline. It is important to note, however, that the positive results were caused by an increase in average deal amount, as the number of first round deals was actually lower than in the previous three-month period.

Overall, a majority of Q1 2002 disbursements went to expansion-stage companies that were raising their second or third round of venture capital financing.

In terms of geographic bragging rights, 34.7% of Q1 venture disbursements went into Northern Calif.-based companies. New England and Southern Calif. came out in a virtual deadlock for second place in terms of overall capital committed, but New England had many more companies funded.

Give That Company A Cigar!

One of the causes for the Q1 disbursement dip is that the venture market hosted just a handful of mega-deals. In fact, just two companies managed to raise over $100 million, and just three more surpassed the $70 million mark.

Leading this select group was Caspian Networks Inc., an IP infrastructure provider that nabbed $120 million in a Series D funding round at the end of February. Investors on the deal included U.S. Venture Partners, New Enterprise Associates, Merrill Lynch, Morgenthaler Venture Capital and Oak Investment Partners. Despite its venture capital success, however, Caspian’s $195 million post-money valuation on the deal was a far cry from the $389 million it was worth after completing its Series C deal in late 2000.

The other company to break the $100 million barrier was Bill Barrett Corp., an independent natural gas and oil exploration firm that raised $107.5 million at the end of March. The Denver-based company received a $143.75 million valuation from a roster of investors that included Warburg Pincus, Goldman Sachs and JP Morgan Partners. Other big winners included: Richardson, Texas-based Chiaro Networks Ltd., which raised an $80 million fourth round in early February; Campbell, Calif.-based Syndeo Corp., which secured a $75 million Series C deal in late March; and Santa Clara, Calif.-based Atrica Inc., which grabbed $75 million in a fourth round of funding at a post-money valuation of $160 million.

Whose Money Is It?

The quarter’s most active investor was JP Morgan Partners, which pumped just under $200 million into 29 deals. Next up was New Enterprise Associates, which supplied 23 companies with just over $115 million. Rounding out the top five were Warburg Pincus, U.S. Venture Partners and Battery Ventures.