New Venture Capital Funding Plunges 56%

New investments by U.S. venture capital firms plunged 56% in the first quarter to the lowest level in more than two years, a recent survey said.

Venture investments fell to $11.7 billion from $26.7 billion a year earlier, according to Venture Economics and the National Venture Capital Assn.

That was the lowest since $6.2 billion was invested in the fourth quarter of 1998, the survey said.

Investments dropped as the plummeting stock market and the slump in technology capital spending caused the venture-investing industry to question the long-term payoff from new companies, analysts said.

Also, with the market for new stock offerings nearly frozen over, many venture firms have no way to cash out of previous investments by bringing the companies public.

“The last six months have been the most difficult in the last decade,” said Bill Elmore, a general partner of Foundation Capital, a backer of companies including Commerce One and Onyx Software Corp. “The dot-com hangover is still lingering, and many venture firms are still working through that.”

Yet many venture capitalists still have hefty sums to invest, thanks to record fund-raising from institutional and individual investors in recent years.

An estimated $35 billion remains on the sidelines waiting to be put to work, said Mark Heesen, president of the NVCA.

“You’re coming off a record year in dollars invested,” said Joe Aragona, a general partner at Austin Ventures. “We put out about $40 million in the first quarter and about half of that money is new investments. That was about 60% to 65% of our pace in the first quarter of 2000.”

Some funds continue to attract capital from investors. Foundation Capital last week closed its fourth fund, with $595 million in commitments from investors--about 50% more than its target, Elmore said.

Part of the reason for continuing to raise money is to ensure the firm can support previously funded young companies that might take longer to go public, Elmore said. “If the IPO window is shut for a long time, funds will need to have plenty of money” from private sources, he said.

Some venture capitalists are optimistic that the market for initial stock offerings will bounce back.

“We’ve been investing 15 years and this is the third serious closure of the IPO window we’ve seen,” said Steve Lazarus, founding partner of Arch Venture Partners, which recently raised $380 million for a new fund. “You manage through. There’s the expectation that the IPO window will reopen. It always has.”

Health-care companies may have the best chance among venture-backed start-ups seeking to go public in the near future, said Mitchell Blutt, executive partner with J.P. Morgan Partners.

Still, “The world needs a ‘dream’ sector with very substantial upside” to energize investors, he said.

Technology had filled that role from 1995 through early 2000, but given the losses in many tech stocks over the last year, many investors may remain gunshy about new tech ideas.

Nonetheless, venture capitalists continue to funnel most of their dollars--about 75% of the total invested in the first quarter--into Internet-related companies, the venture funding survey showed.

That reflects many funds’ efforts to keep afloat companies they seeded in recent years.