Where can a serious entrepreneur find venture backing in 2003? Go back to the future. That's where the venture capital industry is headed. According to the "MoneyTree Survey" from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, total venture capital investing in 2002 fell to $21.2 billion, its lowest level in five years. A special analysis prepared exclusively for Entrepreneur shows that out of a total of 3,000 firms attracting venture capital, only 530 start-up and early-stage companies got their first round of funding in 2002--the fewest since 1994.
The trends may seem discouraging, but they represent a return to historical norms after a spike of unsustainable proportions. Bill Elmore, general partner of Foundation Capital, a Silicon Valley fund with $200 million under management, puts it this way: "Too many companies were funded over the last three or four years, and the failure rate jumped. Today, the hurdle to make a new investment is way up. But don't mistake patience for pessimism."
Roger Novak, general partner of Novak-Biddle in McLean, Virginia, another fund with $200 million under management, agrees: "This is a good time to be an early-stage investor. The entrepreneurs we're seeing have well-thought-out business models. Furthermore, when we fund a company, we're not seeing eight or 10 competitors coming in behind them in 12 to 18 months."
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Successful firms that were founded in tough economic times are the stuff legends are made of--companies like Compaq Computer and Lotus Development in the early 1980s and Palm Computing and Starbucks in the early 1990s. The market today is more akin to those time periods than to the boom that peaked in 2000. Mark Heesen, president of the National Venture Capital Association, notes this return to a traditional approach. "Venture capitalists are still taking calculated risks on new companies but realize that these new relationships will likely span many years and require several additional rounds of capital," he says.
An entrepreneur today has to banish the notion that every new idea will be given its due, that "every dog has its day." That may have been partially true during the boom years, but a lot of those companies turned out to be real dogs. These days, only the best of the best get venture backing. "Survival of the fittest" is better guidance. --T.T.L.