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Wed, Jul 30, 2003 - Page 12 News List

Venture capital spending in US gaining velocity

BOTTOMING OUT The first quarter-on-quarter increase in US venture capital spending in more than three years signals bright prospects for IPOs

BLOOMBERG

US venture capital spending had its first quarter-on-quarter increase in more than three years, as computer, Internet and wireless-services stocks rallied.

Venture capitalists put US$4.3 billion into 669 companies in the three months through last month, up 6 percent from a total of US$4 billion in 647 companies in the first quarter.

Spending fell 28 percent from last year's second-quarter total of US$6 billion, according to a survey by PricewaterhouseCoopers LLP, Thomson Venture Economics and the Arlington, Virginia-based National Venture Capital Association.

The rise, the first in 13 quarters, came amid a recovery in stocks, which brightened prospects for selling investments through initial public offerings.

The NASDAQ Composite Index, a benchmark for technology stocks, rose 21 percent last quarter, and the value of IPOs was more than four times as much as that of the first quarter, according to the most-recent data compiled by Bloomberg.

"Things are bottoming out," said Sanjay Subhedar, a general partner at Storm Ventures in Palo Alto, California.

"It's not getting worse but it's not getting significantly better," Subhedar said.

The average funding round was about US$6.3 billion, about half the peak of US$13 billion in 2000, as costs for office space, salaries and other expenses declined, said John Taylor, vice president of the National Venture Capital Association.

Companies still have about US$70 billion to US$80 billion in unspent commitments, half of which is probably reserved for existing investments, Venture Economics estimates.

The last quarter-on-quarter rise in venture capital spending took place in the first quarter of 2000, when investments climbed to a record of US$28.6 billion from US$23.7 billion in the fourth quarter of 1999, according to the survey.

Damping demand for venture capital was a slump in corporate spending, investors and analysts said.

In the first half, investments in equipment, machinery and the like totaled US$8.32 billion, down from US$12.5 billion a year earlier.

"One thing no one has seen yet is corporate spending" rebounding, said Jesse Reyes, vice president of Thomson Venture Economics, based in Newark, New Jersey.

Still, a sign investors may be willing to take on more risk is the increase in investments in seed-stage companies, Tracy Lefteroff, global managing partner of PricewaterhouseCoopers' venture capital practice, said on a conference call.

Investments in so-called early-stage companies rose 43 percent from the first quarter to US$956 million, the company's survey said.

"What a lot of venture capitalists have been doing the last couple of years is investing in later-stage companies because the pricing has been so attractive," said Susan Mason, a general partner of Onset Ventures of Menlo Park, California, in an interview.

Mason said Onset has made four investments this year and is planning for another three, which has been its annual pace for the past 20 years.

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