VC Investments Dip in Q3 –

Buyout investors may have returned to the deal-making table in Q3, but venture capitalists continued to decline the invitation.

Between July and September, 647 U.S.-based companies raised approximately $4.45 billion in venture capital, according to figures released last week by PricewaterhouseCoopers, Venture Economics (publisher of Buyouts) and the National Venture Capital Association. The total is down more than 25% from the $6.01 billion pumped into 838 companies during the previous quarter, and represents a 49% drop from the $8.68 billion raised by 1,085 companies in the third quarter of 2001. Average deal size also declined, with just $6.92 million invested per transaction.

“Venture capitalists have concerns regarding the front-end and back-end of the deals they are evaluating,” says Mark Heesen, 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 revenue 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.”

Overall, investors were most likely to invest in expansion-stage capital, an asset segment that received 57% of all committed capital and 56% of all deals during Q3. These percentages were relatively similar to what was seen in Q2, as was the same for early- and seed-stage deals. The only real gainers were later-stage plays, which represented 20% of all committed capital in Q3 after making up just 13% in Q2. Later-stage deals also provided the largest per-deal capital average with $9.67 million.

The quarter’s largest winner in terms of capital commitments was NuVox Communications Inc., a communications services provider formerly known as Gabriel Communications Inc. The Chesterfield, Mo.-based company in August secured $66 million in its fifth round of funding from such existing investors as JPMorgan Partners, Goldman Sachs, Norwest Equity Partners and Whitney & Co. Not all was rosy for NuVox, however, as its $97.65 million post-money valuation was a far cry from the $444.89 million mark it received following an $87 million Series D funding in September 2001.

The most active investor in Q3 was U.S. Venture Partners, which pumped $52.6 million into 16 deals for companies like MicroVention Inc., DiTrans Corp. and BitBlitz Communications.

Internet-specific companies led the industry sector rankings in Q3, taking in 25.54% of all investments. Next was the computer software sector with 15.76%, followed by medical/health (15.76%), communications/media (12.83%), semiconductors (8.23%) and biotechnology (6.69%). As for geography, Northern California-based companies bested all comers by snaring 31.5% of all disbursed venture capital. New England came in second with 12.41 percent.