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Seed Money

VC financing for early-stage companies is back in bloom.

After nearly three years of decline, the amount of capital invested by venture funds is back on the rise. According to a recent MoneyTree Survey by National Venture Capital Association, PricewaterhouseCoopers and Thomson Venture Economics, venture investments in early-stage companies jumped 43 percent and accounted for more than $956 million nationwide during the second quarter of this year-an increase of $288 million from the first quarter. Since venture funding started its free-fall in 2000, VC firms have been reluctant to invest in new ventures, preferring instead to shore up existing portfolio companies or to invest in lower risk, later-stage companies. This jump marks the first significant increase in early-stage funding since the fourth quarter of 1999.

The results were corroborated by San Francisco VC research firm VentureOne, which showed that start-up funding in the second quarter of this year increased 13.6 percent over the first quarter. The increase in activity is not limited to the VC epicenters of New York and California. Small but meaningful increases were noted across the country and across several industries. A strong surge in biotech and health-care investing led the way.

Garheng Kong, partner at Intersouth Partners, a VC firm in Durham, North Carolina, says he's seen more early-stage life science investors cracking open their checkbooks. "There's definitely more early-stage activity," he says. "The low-hanging fruit has been picked, so the later-stage companies with a pipeline full of customers have either been funded or have gone away. But the science never stops, and VC dollars are now being focused back on the seed and early-stage deals." According to VentureOne, biotech companies at all stages, including drug discovery and development companies, claimed more than 18 percent of all venture dollars.

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This article was originally published in the November 2003 print edition of Entrepreneur with the headline: Seed Money.

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