January 28, 2003 VCs back to prebubble pace By Vyvyan Tenorio Venture investing in 2002 reverted to the sober atmosphere that prevailed before the late-1990s tech boom, several new reports suggest. So many startups; so few investments. Three separate sets of venture capital investment data released Monday, Jan. 27, confirmed just how quickly venture capital firms have returned to investment basics prevalent before the tech bubble. Total venture investments in 2002 dropped to $21.2 billion, roughly half of 2001's $41.3 billion, with the emphasis falling on the funding of existing portfolio companies, according to the latest survey by PricewaterhouseCoopers/Venture Economics, in conjunction with the National Venture Capital Association. This is comparable to 1998, just before the tech bubble, which saw $21.6 billion flowing to entrepreneurs. "We're leaving the bubble and returning to more normal levels," said John Taylor, NVCA vice president. In the last quarter of 2002, VC money flows were essentially flat, with investments at $4.2 billion compared with $4.5 billion in the third quarter of last year. As in previous quarters, financing rounds remained focused on later-stage rounds rather than seed- and first-round investments as VCs became more risk averse. "Too many companies were funded during the bubble," said Bill Elmore, general partner at Foundation Capital of Menlo Park, Calif. "Now, some companies are being financed but very selectively." Indeed, restarts, or financing rounds with significant "wash out" dilutions for nonparticipating investors, were more prevalent in 2002 than ever before, according to another set of data released Monday by VentureOne of San Francisco. In the fourth quarter, restart rounds accounted for fully 5% of all transactions, up from 1% in previous years. The average for the full year 2002 was 3%, the report said. As a result, new investments fell from 37% of the deals in 2001 to 30% in 2002. But John Gabbert, vice president at VentureOne, added that "at no point in the past has there been so large a pool of existing companies to support." Elmore agreed. He said the hurdle rate for new investments is "way up," with a much longer decision-making process now in place among VC firms. "With regards to old companies, Darwin is still at work," he added. Still, Elmore said 10 existing portfolio companies got financed last year, and the failure rate was far fewer for the firm than in 2001. And that observation dovetails with a third report released Monday by Growthink Research of Venice, Calif. Many investors continued to pass on new investments, but others took advantage of opportunities to invest in high-growth companies at favorable valuations, Growthink said. This helped offset another sharp drop in investing levels, the research house added. According to the PwC/Venture One report, only the life sciences sector -- comprising biotechnology and medical devices startups -- was a bright spot in the fourth quarter and the full year. In 2002, life sciences investments jumped 15% to $960 million in the fourth quarter. Life sciences climbed to its highest proportion of investing yet, at $4.7 billion in 2002, or 22% of total VC investments. This compared with 13% in 2001. Biotech drew more than medical devices, with $2.8 billion and $1.9 billion respectively, for the year. All other sectors, including the perennial leader, software, experienced declines for the quarter and the year. www.TheDeal.com Copyright © 2003 The Deal LLC