January 30, 2003 Venture capital investment rolls back to 1998 levels By Michael Liedtke, AP Business Writer SAN FRANCISCO (AP) - Venture capitalists finished 2002 plodding at the slowest investment pace in nearly five years as the limping industry continued to pick up the pieces from the high-tech crash. The industry's most closely watched survey, set to be released Tuesday, pegged fourth-quarter investments at $4.2 billion, a 49 percent drop from $8.2 billion at the same time in 2001. That was the same amount as the first quarter of 1998, when venture capitalists also anted up $4.2 billion, according to statistics compiled by PricewaterhouseCoopers and Venture Economics for the National Venture Capital Association, a major trade group. A separate study distributed Monday by Ernst & Young and industry research firm VentureOne came up with slightly different numbers, but reached the same conclusion - venture capital is trickling at the slowest rate since the first quarter of 1998. For all of 2002, venture capitalists invested $21.2 billion, the lowest full-year sum since 1997's total of $15.5 billion, according to the PricewaterhouseCoopers/Venture Economics study. While analysts say it's unlikely venture capital investments will fall much below 1997's level, "There is nothing out there that says things are going to improve this year," said John Taylor, vice president of research for the National Venture Capital Industry. Venture capitalists still have an estimated $85 billion of uninvested funds, raised largely during the dot-com boom. That's enough money to last five years if things continue at the same investment pace as 2002's fourth quarter. Last year's total was just slightly below the $21.5 billion invested by venture capitalists in 1998 - the early stages of the dot-com mania that elevated the high-tech industry to dizzying heights. Hoping to profit from the boom in tech stocks, venture capitalists poured $162 billion into startups during 1999 and 2000 while fattening their funds for future investments. The horrible high-tech slump of the past three years has prompted gun-shy venture capitalists to become more discriminating about new prospects. "If you're an entrepreneur, certainly the bar has been raised on the types of ideas that will get funded," said Tracy Lefteroff, global managing partner of venture capital for PricewaterhouseCoopers. In 2002, 756 companies received their first injection of venture capital, a 35 percent decline from 1,178 companies in 2001, the study said. Meanwhile, venture capitalists cut off their biggest losers in 2002, a trend that is expected to continue this year as more startups created during the bubble years run out of money. "There are still a lot of horses in the stable that are either going to have to race, be put out to pasture or just shot," said Jesse Reyes, a vice president for Venture Economics. Venture capitalists put the most money into software startups during 2002, extending a long-running fascination with that sector. Software companies received $4.3 billion from venture capitalists last year, down 50 percent from 2001. Software has attracted the most venture capital in 10 of the past 12 years, Lefteroff said. As tech companies become less valuable, venture capitalists haven't had to dig as deep into their pockets to buy stakes in startups. Venture capital investments averaged $6 million per deal in 2002's final quarter, down from $8.2 million in the previous year. When tech stocks hit their peak during the first quarter of 2000, venture capitalists invested an average of $13.1 million per deal. Besides conserving their money, venture capitalists also are spending far longer kicking the tires of a startup than during the dot-com frenzy, said Bill Elmore, a general partner with Foundation Capital in Menlo Park. "We are more risk averse than a few years ago, but patience shouldn't be mistaken for pessimism," Elmore said. "There is still a lot of optimism out there."