January 29, 2003 Managed Investing: U.S. Venture Investments Dwindle -- Surveys Show Funds Flow Toward Proven Companies, Away From Risky Start-Ups By Ann Grimes Dow Jones Newswires It has been a sobering year for U.S. venture capitalists, as investments finished 2002 at a level comparable to that last seen in 1998, according to two surveys. Companies collected $21.2 billion (19.53 billion euros) in U.S. venture investment last year, off nearly 50% from $41.3 billion raised in 2001 and down from $106.6 billion in 2000, the top year ever for venture investment, according to the MoneyTree Survey done jointly by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. In 1998, entrepreneurs collected $21.6 billion from venture capitalists, who invest private funds in start-up businesses. Those trends were underscored by the Joint U.S. Venture Capital Survey done by Ernst & Young and VentureOne, which reported that venture investing was down 44% for the year. Both studies indicate that venture capitalists are attempting to "right size" their industry while investing less in risky start-ups and more in companies with proven business models and revenue streams. The one bright spot for the quarter and the year was in the life-sciences sector, especially biotech. Industry analysts described the investment pace as "more realistic" and "more sustainable" than the unprecedented run-up in venture capital that peaked in 2000. "We may finally be near the bottom," said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers's venture-capital practice. A total of 3,011 deals were funded in 2002, down from 4,712 in 2001 and 8,221 in 2000, the MoneyTree survey shows. Funding of $4.7 billion for life sciences, which includes biotechnology and medical devices, represented 22% of all venture-capital investment for the year, up from 13% in 2001, the survey found. For the fourth quarter, investment of $960 million grew 15% from the preceding quarter. Companies in the life-sciences sector, including 105 biotechnology companies, attracted the most first-time financing -- that is more than the 70 funded in 1999 and 106 in 2000, peak boom years. Software continued to account for the most deals in 2002, with 799 deals attracting $4.3 billion, or 20% of the total. Telecommunications came in second, with 335 deals accounting for $2.9 billion, or 14%. But in these and other sectors, such as networking, deals and dollars were down for both the quarter and the year. Among the companies having the toughest time: Those financed during the bubble, and now looking for more money. "Darwin is still at work," said Bill Elmore, a general partner with Foundation Capital, a venture firm in Menlo Park, California. "In general, too many companies were funded." Things remain "very selective." The VentureOne survey noted an uptick in "restarts," financing rounds characterized by lowered valuations that essentially "wash out" existing investors who fail to participate in a new funding round. Restarts accounted for 5% of fourth-quarter venture-capital transactions. Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved.