Funding Up for New Ventures
After plunging for more than a year, venture capital investment stabilized during the fourth quarter in Southern California and the nation, with fledgling biotechnology and software firms attracting more funding, according to a survey to be released today.
Across the country, venture capital firms pumped $7.1 billion into 856 entrepreneurial ventures, up from $7 billion in the third quarter, when 810 ventures received funds, the Venture Economics data service reported.
In Los Angeles and Orange counties, investment rose to $412million from $357 million, with 46 ventures receiving financing in each quarter.
Although the figures reversed a downward trend that began in mid-2000, levels remain far below the giddy peaks of earlier that year, when Internet mania reigned. Venture capital firms pumped $99.6 billion into businesses in 2000, but the funding tumbled to $36.5 billion last year.
Still, “the free-fall is over and we’ve landed on higher ground,” said Tracy Lefteroff, global managing partner for venture capital at PricewaterhouseCoopers, which helped sponsor the survey.
Investment tailed off in the overextended telecommunications and networking equipment businesses and in the computer chip industry, which has been in one of its periodic downturns. But software companies attracted 22.5% of the total investments in the fourth quarter, up from 16.9% in the third quarter.
“There are a lot of interesting companies in that space,” said Bruce R. Hallett, managing partner at Miramar Venture Capital in Newport Beach, a new fund that has raised $80 million, half of it from Broadcom Corp. co-founder Henry Samueli.
The life sciences sector--biotech, medical devices and health care--proved attractive to investors as well. These companies attracted 18.5% of the total investments last year, more than double their share two years earlier.
“Nothing’s exactly hot these days, but health care is warm,” said Nicholas Binkley of Forrest Binkley & Brown, a fund with offices in San Diego and Orange counties that invests in early- and later-stage tech companies and provides expansion capital to smaller manufacturers.
Binkley said health care had come into vogue mainly because the sector had been overlooked during the years when Internet entrepreneurs dominated investors’ attention.
By contrast, retailing and distribution attracted only 10% of venture investments last year, down from 18.4% a year earlier, reflecting the fallout in e-retailing over the last 18 months.
Most venture capitalists spent last year deciding whether already funded companies should be nursed back to health or be allowed to die--freeing funds to be pumped into the survivors.
But now, “money is starting to loosen up a little,” Binkley said.
Pressures to cut costs and raise capital for already funded companies “didn’t leave a whole lot of time for venture capitalists to look for new opportunities,” said Jeanne Metzger, a vice president for business development at the National Venture Capital Assn. “But in the fourth quarter, especially December, their time was starting to free up.”
Venture capitalists also are putting more emphasis on investing in companies with proprietary new technologies, said Gregory Njoes, a PricewaterhouseCoopers audit partner for technology firms from Pasadena to Santa Barbara. “They’re making sure there’s really something there,” he said.
The slowdown intensified as investors demanded larger stakes in companies in return for capital. Owners and previous investors resisted new funding under terms that would have significantly diluted their ownership.
But experts say that has begun to change as the need for new funds at surviving companies becomes acute.
Metzger said the consensus among her association’s 450 members seems to be that the economy is slowly improving and the stock market’s appetite for initial public offerings is growing stronger as well. IPOs, which allow venture capitalists to cash out at a profit, had come to a near standstill before last quarter, she pointed out. There were 14 venture-backed IPOs in the fourth quarter, compared with only five the previous quarter, she said.
But Metzger doesn’t expect a significant increase in venture investment until perhaps the second quarter.
“What we’ve seen overall so far is a stabilization of venture investing after several quarters of significant decline--a bottoming out and slight uptick,” she said.
