VC gets EZ -- Venture capital pipeline
stays wide open, especially for dot-coms
By Jenny C. McCune • Bankrate.com

Last year, venture capital investment broke another record, with more money invested in more businesses than ever before.

The pipeline looks like it will stay open in 2000, but startups have the best chance to reap the benefits if they're in the right place and the right industry -- namely, the Internet.

1999 a record year
Venture capital investment reached $48.3 billion in 1999, a 151.6 percent increase over the year before, according to figures compiled by the National Venture Capital Association and Venture Economics, a division of Thomson Financial Securities Data.

Venture capitalists invested in 3,649 companies in 1999, up 26 percent over the number of companies that they invested in during 1998.

"This is excellent news for entrepreneurs all over the country, especially those in technology," says John Martinson, NVCA's chairman. "More entrepreneurs are receiving funding than ever before. Nineteen ninety-nine was a spectacular year for building companies, and we expect the upward trend to continue."

Of course, for every company that gets venture backing, a slew walk away empty-handed. As it has been since the mid-1990s, the big investment winners last year were high-technology concerns; specifically, companies with an Internet bent to their business. Approximately two-thirds of the $48.3 billion went to Internet companies, up from the one-third that got a slice of the venture capital pie in 1998, notes John Taylor, NVCA's director of research.

Venture capitalists put up big money and take on big risk in exchange for an ownership stake and a chance at a big return. They tend to move in packs toward the hot investment that offers the potential for the biggest return -- and last year that meant the dot-coms.

If you're hot, the terms get easier
Internet companies thus found it easier to negotiate better terms with VCs. Plus they can get larger investments than in the past, Taylor says. "These companies need more money," the research director says. "It's not just a matter of delivering a better mouse trap. They also need money to establish a brand and create an identity and that can be an expensive proposition. Venture capitalists realize this and are increasing their investments."

Though Internet companies received the bulk of the money, companies outside cyberspace didn't walk away empty-handed, Taylor notes. "Internet-related companies got about $32 billion. That still leaves $16 billion that went to companies outside of the Internet."

For example, companies in the medical/health sector received $2.5 billion in financing while consumer-related firms received $1.7 billion. Biotechnology firms garnered another $1.2 billion.

Dot or not, you need big-buck potential
Whether companies are oriented toward the Internet or biotech, in order to succeed at the venture capital game, they need to offer investors a blockbuster of a deal and company management that investors believe can execute the brilliant business plan.

That doesn't mean that the company's making money now or in the short-term, but down the road the return on investment will be sizable. That's why so many Internet companies, despite poor current financials, receive so much venture capital backing. It's their potential for big bucks that keeps the VC's capital coming.

Go west, young company -- or northeast
Geographically speaking, the two regions that got the most money were Northern California ($16.9 billion) and the Northeast ($9.6 billion). The Pacific Northwest and Northern California showed the largest percentage gains, 210 percent and 215.2 percent, respectively. Although they were the biggest gainers, every region in the U.S. had venture capital investment increased by 60 percent or more, according to the NVCA.

"Venture funding tends to follow the opportunities, wherever they may be," says Steve Lazarus, managing director of ARCH Venture Partners and an NVCA board member. "These statistics show that talented entrepreneurs can be found in many different communities throughout the nation, thus attracting more money to their respective regions."

The good news for small businesses is that there seems to be no slowdown in funding. Venture capitalists are having no problems in raising funds in which to invest in companies. "Nineteen ninety-nine was a record not just for investment, but for fund raising (venture capitalists raising capital to invest)," Taylor says. "That means the pipeline is healthy right now and that will continue into this year."

Jenny C. McCune is a contributing editor based in Montana
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-- Posted: Feb. 24, 2000