Venture Investment Still Strong in 3rd Quarter
Despite a volatile stock market, venture capitalists continued to pour money into young businesses nationwide at near-record levels in the third quarter, a study due out today shows.
Venture dollars invested in Los Angeles County firms jumped 79% from a year ago, while Orange County companies picked up 28% more dollars.
But, nationally, venture investment declined sharply in the quarter in Internet-related businesses and computer software, as compared with the second quarter. Instead, some venture capitalists shifted their focus--and dollars--to medical, biotech and computer hardware companies, the study shows.
A total of $25.9 billion in venture funds was invested in 1,774 companies nationwide in the third quarter, compared with $14.3 billion in 1,330 companies in the third quarter of 1999, according to a survey by the National Venture Capital Assn. in Washington.
But the total in the latest quarter was off about 7% from the record set in the second quarter--when many tech stocks peaked, then crashed.
Venture capital funds typically invest in young, private firms, providing the money needed to get the businesses off the ground. The goal is to eventually take the companies public or sell them--at a substantial profit for the venture investors.
Though the dicey stock market of the last eight months has delayed many companies’ plans for stock sales, venture funds continue to invest heavily in new businesses, said Jesse Reyes, a vice president with Venture Economics, which helped draft the survey.
The hefty investment pace is a function of the huge sums raised by venture funds from well-heeled investors over the last two years, a continuing flow of cutting-edge ideas from entrepreneurs and a still-healthy economy, Reyes said.
Even so, many venture capitalists are investing more in firms they have already funded, rather than in new ideas, the survey found.
Also, given the crash of many “dot-com” businesses, the $11.54 billion invested in Internet-specific businesses in the third quarter, while still huge, was down 17.6% from the second quarter total, Venture Economics said.
By contrast, dollars invested in computer hardware firms totaled $822 million, up 51% from the second quarter.
“There has been a shift back to the bread-and-butter of venture capital investing--hardware companies and semiconductors,” said James Breyer, a financier with Accel Partners in Silicon Valley.
In California, companies in the northern part of the state--dominated by Silicon Valley--continued to reap the bulk of venture funds: They received $8.7 billion in the quarter, or almost 30% of the national total.
Southern California companies got $1.94 billion, or about 7% of the national total. That was up nearly 40% from a year earlier.
The Southland region, which includes L.A., San Diego and Orange counties, lagged funding of New York companies ($2.8 billion) and New England firms ($2.79 billion).
But with many venture capitalists looking more toward entertainment, biotech and computer hardware firms, “Southern California will attract a greater and greater percentage of the dollars over time,” Breyer predicted.
In the three major counties:
* Venture capitalists invested $755 million in 59 Los Angeles County companies in the third quarter, up from $422 million in 42 firms in the same quarter of 1999.
* In Orange County, 36 companies received $439 million in funding, compared with $343 million in 24 companies a year earlier.
* In San Diego, $554 million was invested in 58 companies, compared with $529 million in 39 companies a year earlier.
Major Southland venture investments in the quarter included a $100-million investment in Enfrastructure, an Aliso Viejo business-campus development firm formed by Scott Blum, the founder of online superstore Buy.com; a $68-million investment in Edmunds.com, a Santa Monica Internet site devoted to automotive information; and a $61-million investment in Business.com, a Santa Monica business-information resource Web site incubated at ECompanies.
Nationwide, the average size of venture investments has continued to increase, Venture Economics said. The average company investment was $17.6 million in the first nine months of this year, compared with $6.8 million in 1998.
That reflects, in part, many venture funds’ decision to devote more capital to later-stage companies rather than start-ups, experts say.
“Venture capitalists are spending a lot more time dealing with existing portfolio companies and budgeting more money to finance them,” Breyer said.
Some of the funds may have little choice, with the current stock market climate unfavorable to many tech firms that had expected to go public this year.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Venture Targets
Here are some of the major business sectors that attracted venture capital investment in the third quarter, and dollars invested in each.
*--*
Q3 funding Industry (millions) Internet $11,539 Communications 4,589 Software 3,009 Semiconductors 2,152 Medical 1,121 Biotech 977 Computer hardware 822 Industrial 434 Consumer 238
*--*
Source: Venture Economics
