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Volatile venture capital down, but not out
By Jenny
C. McCune • Bankrate.com
What goes up must come down.
The venture capital market confirmed that adage in
the first quarter of 2002. After years of impressive gains fueled
largely by the dot-com frenzy, this financing option decreased,
both in the number of deals and the amount of money involved.
VentureOne, a San Francisco firm that tracks venture
capital investment, reports that VC money remained flat in the fourth
quarter of last year and then fell 26 percent this year to $5.1
billion.
The number of deals faced a similar fate. In the first
quarter, they fell to 495, again a 26 percent drop compared to the
prior quarter.
Does this decline mean that VC is no longer a viable
financing tool? Of course not. Five billion dollars is still an
awful lot of money. Companies just have to be better prepared to
compete for it now.
Why so many VC vacancies?
Particularly hard hit early this year was the consumer and business
services segment.
This sector, which received $8 billion in venture
capital at its peak in the first quarter of 2000, has been shrinking
at a "rate commensurate to its growth," according to VentureOne.
Basically, it's been retracting as fast as it once grew.
Investment in the health care sector also fell 30
percent in the first quarter of this year to $1.1 billion.
Possible reasons abound for the sharp drop-off. Among
the usual suspects, two stand out:
1. Venture capital firms are still smarting
from losses suffered after investing in too many dot-coms that
went bust. Consequently, investors are being pickier about the
companies they put money into and how much they commit.
2. The reduction in VC spending is a correction, which
is simply aligning the amount invested with the amount of the
expected return.
"The consumer and business services segment really
drives home the maxim 'the harder they fall.' The run-up of investment
was a sign of the times, and the current deflation serves as a cautionary
tale," noted VentureOne vice president Diana Robinson when
releasing the first quarter numbers.
"Nevertheless, we're heartened by the progress
of smaller sectors like electronics and medical IS [information
systems]," says Robinson, "and by the continued support
for Internet infrastructure companies and ISPs."
Still some VC appeal
The communications and networking infrastructure industry is bucking
the downward trend, with the biggest VC gain in 2002's first quarter.
Venture capital investment in companies that provide
computer and telephone networking and communication equipment (routers,
switches, hubs, etc.) rose to $1.6 billion, from $1.5 billion in
the 2001 fourth quarter.
The communications and networking sector also saw
the five biggest deals for the quarter. Leading the way was Caspian
Networks, a developer of IP switching devices. According to VentureOne,
the company received $120 million in fourth-round financing.
Not easy, but still available
So, what's the bottom line for businesses seeking venture capital?
Does the early drop in VC money mean such funding will be harder
to get throughout 2002?
It's anybody's guess what the rest of the year will
hold. What is certain is that for the near term, the days of easy
money are gone. But the process has gotten more realistic. That's
actually better for everybody, especially owners who have legitimate
businesses.
And the way to gain VC dollars remains unchanged:
A company must present a winning investment opportunity.
Demonstrate that your company can make money for investors,
and investors will flock to your door. If you can't show the ability
to execute on a business plan and your product is of dubious marketability,
your company probably won't land any VC money, regardless of how
much is out there.
Jenny C. McCune is a contributing
editor based in Montana.
-- Posted: May 29, 2002
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