January 28, 2003 Financial: Venture Funding Fell in 2002; Investment in Area Firms Was Lowest in 4 Years By Nicholas Johnston, Washington Post Staff Writer Venture capital in the Washington area ended 2002 with investment activity sinking to its lowest level in four years. For the final three months of 2002, 49 area companies raised $252.5 million in venture capital, down about 20 percent from the prior quarter, according to data released today. For the year, 197 companies raised $1.1 billion, a pace of activity similar to that of the quarterly rate at the height of the Internet boom in 2000. The 2002 slowdown returned investment levels to what was normal in 1998. "Each quarter since the first quarter of 2000 has been a down quarter," said John Taylor, vice president for research for the National Venture Capital Association, an industry trade group. "I don't know if we can look at this and say we're at the bottom." Nationally, 692 companies raised $4.2 billion in the fourth quarter of 2002 and $21.2 billion for the entire year, according to the MoneyTree Survey of venture capital investing conducted by PricewaterhouseCoopers, research firm Thomson Venture Economics and the NVCA. National funding totals are half of what they were in 2001, when $41.3 billion was invested by venture capital firms. However, venture activity measured by the number of companies that received investment has leveled off in the Washington area. For the year, an average of 50 companies raised money each quarter, in line with the fourth quarter's total of 49. "You have to look at the number of deals, not dollars," said Roger Novak of Novak Biddle Venture Partners in Bethesda. Among local funding deals, companies that make equipment for networks or medical uses raised the most money, accounting for a little less than half of the total. But most notable was the continued dominance of software companies. Forty-seven software development firms raised $236.2 million in 2002; by comparison, 125 such firms raised more than $1 billion in 2000. Later-stage companies continue to receive most of the investment capital as venture firms focused on companies they had already backed. In the fourth quarter of 2002, just 21 percent of investment dollars went to companies raising money for the first time, compared with 75 percent for "expansion stage" firms, some of which raised second or third rounds of funding from prior investors. Local trends in early-stage investment were also apparent nationwide as about 20 percent of investment dollars went into first-time deals in 2002. Expansion-stage firms raised $13.3 billion last year nationwide, about 63 percent of the total. "By the peak of the industry you probably had about 50 percent of money going into start-ups," said Jesse Reyes of Thomson Venture Economics. That percentage has fallen as the economy soured and the industry matured. "Venture capitalists are looking downstream at companies that are profitable . . . moving away a little bit from the risk of start-ups." "We are a little more risk-averse than we were two years ago," said William B. Elmore of Foundation Capital in Menlo Park, Calif. "But I don't think anyone should mistake patience for pessimism." Copyright © 2003, The Washington Post Co. All Rights Reserved