The three-year descent in venture capital investments tapered off in the third quarter, suggesting the industry's wrenching downturn may finally be coming to an end.
Venture capitalists invested US$4.2 billion in startups during the three months ended last month, a 4 percent drop from the same time last year, according to a survey released yesterday by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
It marked the smallest year-to-year decline of the venture capital contraction that began in the final quarter of 2000 when the fallout from the dotcom bust began to crush investment portfolios.
Although the losses from the industry's US$161 billion investment spree during 1999 and 2000 are still piling up, there's "a lot less trepidation in the venture community now," said John Jaggers, a general partner with Sevin Rosen Funds.
Venture capitalists say the recent surge in high-tech stocks will likely stimulate more interest in the kinds of companies that they typically finance.
"There is no question that the public markets ultimately drive the success of [venture-backed] companies," said John Taylor, vice president of research for the National Venture Capital Association, the industry's largest trade group.
The ripple effect from the recent rise in high-tech stocks probably won't become evident for another six or seven months -- the typical amount of time venture capitalists take to review a prospective investment, said Deric Emry, a general partner with ABS Capital.
Meanwhile, venture capitalists are diversifying beyond their bread-and-butter holdings in information technology startups.
In the third quarter, venture capitalists poured US$830 million into biotechnology, more than any other sector. It's the first time in seven years that biotech has topped the venture capital industry's quarterly investment list.
By comparison, computer software -- the second most popular niche -- attracted US$819 million in venture capital during the third quarter.
Meanwhile, investments in telecommunications startups fell to a five-year quarterly low of US$492 million. Venture capitalists invested US$26.5 billion in telecommunications during 1999 and 2000.
In a sign that the industry may be regaining its financial equilibrium, the level of venture capital investments has ranged between US$4 billion and US$4.6 billion in each of the last five quarters.
While those figures underscore how far the industry has fallen since its quarterly investments peaked at US$28.6 billion during the first three months of 2000, they also suggest things have stabilized, said Jesse Reyes, a vice president with Venture Economics.
Venture investments this year are expected to range somewhere between US$16 billion and US$20 billion, the lowest level since 1997. The recent restraint could turn out to be a good thing; venture capital investments made during 1996 to 1997 generated some of the biggest returns in the industry's history.
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