Setting A New Pace
The results are in: 2000 was another banner year for venture capital investment-but you may have missed it amid all the lamenting over the slowdown in fourth-quarter investment. In fact, total VC investment for the year climbed 80 percent from 1999, to $68.8 billion, according to statistics from the PricewaterhouseCoopers (PwC) "MoneyTree Survey," in partnership with VentureOne.
Not bad-which is why some industry experts are urging calm despite the 18 percent drop in VC investment from third quarter to fourth quarter. "Sure it's cooled off somewhat-you'd expect that," says Tracy T. Lefteroff, global managing partner of PwC's Private Equity and Venture Capital Practice. "Nobody could have kept up the torrid pace we saw earlier in the year. But there's still cash around, and we're getting healthy amounts of money flowing into good companies."
Though the dollars are still plentiful, more of them may now be reserved for companies already in VCs' portfolios than for ventures seeking first-time funding, according to statistics released by the National Venture Capital Association and Venture Economics. The NVCA/VE study showed even greater growth overall in venture investment, from $59.4 billion in 1999 to $103 billion in 2000. It also found that in Q4 2000, 52 percent of resources were directed toward existing portfolio companies, compared with 25.5 percent for first-round financings.
That's good news for companies already being funded, but entrepreneurs who are hoping to get their share of VC dollars might be disappointed. "It's clearly more challenging for entrepreneurs seeking VC funding for the first time," says Josh Lerner, Harvard Business School professor of business administration and resident VC expert.
But Lerner points out that even in the venture market's down periods, good companies manage to get funded. "In 1975, there was absolutely no money raised by venture capitalists," he says. "But they still invested in companies."
Plenty of new companies are being funded today; the PwC results indicate many of them are in the biotechnology and Internet infrastructure sectors. In fact, biopharmaceutical companies raised $761.9 million in Q4 2000, a gain of 86 percent over the same quarter in 1999.
Not all industries have fared as well. E-commerce companies, for example, took one on the chin; investment in those ventures was down 92 percent in Q4 2000 from its peak in Q4 1999 and now accounts for only 1 percent of all Internet investment. "You would expect that, because most people have looked at the e-commerce sector and said the business models just aren't working," says Lefteroff, adding that service companies focused on e-commerce have met with the same fate. "I think it's going to be pretty tough to get anything funded in e-commerce in the next six to 12 months."
But other sectors-including telecommunications and networking, which raised $18.1 billion in 2000-show promise. And there's plenty of cash out there. Says Lefteroff, "There's probably more available cash in VC funds right now than ever [before]."
As for the 30 percent slowdown experienced from the third to fourth quarter, NVCA vice president of business development Jeanne Metzger says it was expected. "The industry grew over a thousand percent over the past five years, and that is just exceptional and unsustainable growth," she says. "After running at that pace for several years, you've got to slow down and get back to reality."
With 2001 under way, it remains to be seen whether Q4 has marked the start of a downward trend that should concern entrepreneurs. Metzger is quick to dispel the notion: "The way we look at it is, ignore everything you saw in 2000, and then you'll continue to see growth-2000 was something of an anomaly."
C.J. Prince is a New York City writer who specializes in business topics and the executive editor of Chief Executive magazine.
- Harvard Business School, email@example.com, www.people.hbs.edu/jlerner
- National Venture Capital Association, (703) 524-2549, www.nvca.org
- PricewaterhouseCoopers, firstname.lastname@example.org, www.pwcmoneytree.com
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