January 29, 2003 Business News: Venture capital reviving market By Michael Liedtke, Associated Press SAN FRANCISCO — Venture capitalists invested slightly more money in the second quarter than they did in the first quarter, heralding a possible turning point in the industry's three- year slump, according to industry data to be released Tuesday. The $4.28 billion placed in 669 venture capital deals during the three months ending in June represented a modest improvement from the $4.04 billion invested in 647 deals in the quarter ended in March, according to a survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. It marked the first time that the nation's venture capital activity had climbed from the previous quarter since the first three months of 2000 -- a period that coincided with the stock market's record highs. With the dot-com clamor reaching a fever pitch, venture capitalists poured $28.6 billion into 2,164 deals in the first quarter of 2000. The investments in startups have been shriveling ever since as venture capitalists struggled to cope with huge losses that piled up amid the rubble of bankrupt high-tech businesses. There's now a sense the worst is over, helping to make venture capitalists feel more comfortable about taking on new risks, said Todd Dagres, a general partner with Battery Ventures. "I think we have turned the corner from pessimism to optimism," Dagres said. "Nobody wanted to be out there while the knife was still falling. I think enough people now believe the knife has stuck in the ground." Even with the change in sentiment, venture capital investment still remains below last year's pace when the industry doled out $21.2 billion to startups. This year's second-quarter represented a 28 percent drop from the $5.98 billion invested at the same time last year, according to the survey data. "We are still in a period where people are very nervous, but they're not quite as fearful as three or four quarters ago," said Doug Carlisle, a managing director for Menlo Ventures. The stock market's robust rally of the past few months is a big reason why venture capitalists are feeling slightly better. A 21 percent second-quarter gain in the technology-laden Nasdaq composite index made venture capitalists feel a little wealthier after three years of mostly uninterrupted losses. The stock market gains also raised hopes that investors are becoming more receptive to the initial public offerings of startups. Venture capitalists depend on IPOs to reap profits from their investments. "There are reasons to be cautiously optimistic, as long as the public markets cooperate," said Tracy Lefteroff, global managing partner of Pricewaterhouse Coopers' venture capital practice. "With an estimated $70 billion to $80 billion available for future investments, venture capitalists can't afford to get too excited about the recent signs of an economic recovery," said Mark Saul, a general partner with Foundation Capital. "There's still too much money out there chasing too few good deals," Saul said. "You don't want a situation where things go from being depressed to getting giddy. Dramatic mood swings tend not to be helpful in venture investing." Venture capitalists are likely to remain circumspect until big companies increase their budgets and begin buying the software and technology equipment, said Jess Reyes, a Venture Economics vice president. Based on the past year of activity, venture capitalists appear to have found a new equilibrium, with the level of industry investment hovering between $4 billion and $4.4 billion in each of the last four quarters. That's a stark contract from 2000 when venture capitalist invested $106 billion during the entire year. This year's second quarter "looks very much like business as usual, if you forget about the past few years of unusual business," said Heidi Roizen, a managing director with Mobius Venture Capital. Copyright ©2003 ANG Newspapers. All rights reserved.