VENTURE CAPITAL INVESTMENTS CONTINUE DECLINE IN Q3 2002
Economic Realities Return Investing to pre-1998 Levels
Washington, D.C., October 29, 2002 -- Venture capital continued its downward trend in the third quarter of 2002 with total investments of $4.5 billion into entrepreneurial companies, a decrease of 26% from the prior quarter, according to the PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey. Venture capitalists invested $6.0 billion in Q2 2002 and $6.4 billion in Q1 2002. A total of 647 companies received funding compared to 838 in the prior quarter. The last time quarterly venture capital investments were below $5.0 billion was the first quarter of 1998, which was $4.2 billion.
The investment pace has slowed dramatically over the last 18 months due to continued volatility and poor performance in the public markets as well as the decline in corporate technology spending. Venture capitalists have become increasingly selective as they are faced with longer investment cycles, declines in company valuations, and limited exit opportunities.
"Venture capitalists have concerns regarding the front-end and back-end of the deals they are evaluating. On the front-end, they are concerned that young companies are going to have difficulty gaining traction in terms of customers and revenues due to the decline in technology spending. On the back-end, they are concerned about sobering valuations and illiquidity. Both sets of concerns are resulting in an increasingly cautious venture community," commented Mark Heesen, president, NVCA.
Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said: "Neither the venture capitalists nor the entrepreneurs are impervious to business cycles or the public markets. Earlier this month, the Dow was at its lowest level since October 1997; the NASDAQ, its lowest since August 1996. Entrepreneurs must recognize the fact that only the most fundamentally sound deals get done."
Industry Sector Analysis
All major industries experienced declines. Software, historically the leading industry category, showed some resilience in dropping only 10% from the prior quarter to $993 million and 180 deals, accounting for 22% of all venture capital. Telecommunications, the second largest industry category continued to struggle, falling 32% to $555 million in 67 companies. The Networking category saw a comparable decline of 34% to $341 million in 39 deals.
After a string of solid quarterly investing, the Life Sciences industries finally faltered. Biotechnology declined 52% to $468 million and 48 companies. Medical Devices fell 28% to $448 million.
A total of 159 companies received venture capital for the first time in Q3 2002, down from 214 companies in the second quarter. However, these companies received a slightly larger share of overall investment dollars, capturing $1.03 billion or 23% of the total compared to 20% in the prior period.
In general, these companies mirrored the overall industry category trends. The Software category accounted for the most deals and dollars with 46 companies receiving $187 million, or 18% of all first-time financings. That was followed by Biotechnology with 18 companies receiving $137 million. The only other categories with 10 or more first-time financings were Medical Devices, Telecommunications, and Industrial.
Stage of Development
Expansion stage companies continue to receive the most venture capital, receiving 56% of all capital invested and 55% of the number of deals in the third quarter. At the same time, investors continued to fund earlier stage companies. In Q3, companies in the "formative" stages of development (early stage and startup/seed) received similar levels as last quarter, 23% of dollars invested and 30% of the number of deals. This stability in earlier stage investing indicates venture capital firms continue to take longer-term views.
Later stage investing became more dominant in the third quarter, representing 20% of the dollars invested and 15% of the number of deals compared to 13% of the dollars invested and 9% of the number of deals in Q2. This increase in later stage deals demonstrates that venture capitalists have remained committed to their existing portfolio companies and continue to finance their development during this difficult economic period.
According to Jesse Reyes, vice president at Thomson Venture Economics, "Venture funds that focus on later stage deals are finding fewer traditional later stage opportunities -- that is, deals a couple of years from exit -- because the time to exit has lengthened. As a result, VCs are finding that the only new investments that fit their focus are expansion stage deals that require even more time to mature before exit is a possibility."
About the PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association Money Tree Survey
The MoneyTree™ Survey measures cash-for-equity investments by the professional venture capital community in private emerging companies in the U.S. The survey includes the investment activity of professional venture capital firms with or without a US office, SBICs, venture arms of corporations, institutions, investment banks and similar entities whose primary activity is financial investing. Where there are other participants such as angels, corporations, and governments in a qualified and verified financing round the entire amount of the round is included. Qualifying transactions include cash investments by these entities either directly or by participation in various forms of private placement. All recipient companies are private, and may have been newly-created or spun-out of existing companies.
The survey excludes debt, buyouts, recapitalizations, secondary purchases, IPOs, investments in public companies such as PIPES (private investments in public entities), investments for which the proceeds are primarily intended for acquisition such as roll-ups, change of ownership, and other forms of private equity that do not involve cash such as services-in-kind and venture leasing.
Investee companies must be domiciled in one of the 50 US states or DC even if substantial portions of their activities are outside the United States.
Data is primarily obtained from a quarterly survey of venture capital practitioners. Information is augmented by other research techniques including other public and private sources. All data is subject to verification with the venture capital firms and/or the investee companies. Only professional independent venture capital firms, institutional venture capital groups, and recognized corporate venture capital groups are included in venture capital industry rankings.
The National Venture Capital Association (NVCA) represents over 450 venture capital and private equity organizations. NVCA's mission is to foster the understanding of the importance of venture capital to the vitality of the U.S. and global economies, to stimulate the flow of equity capital to emerging growth companies by representing the public policy interests of the venture capital and private equity communities at all levels of government, to maintain high professional standards, facilitate networking opportunities and to provide research data and professional development for its members. For more information visit www.nvca.org.
The PricewaterhouseCoopers Private Equity & Venture Capital Practice is part of the Global Technology Industry Group, www.pwcglobaltech.com. The group is comprised of industry professionals who deliver a broad spectrum of services to meet the needs of fast-growth technology start-ups and agile, global giants in key industry segments: Networking & Computers, Software & Internet, Semiconductors, Life Sciences and Private Equity & Venture Capital. PricewaterhouseCoopers is a recognized leader in each industry segment with services for technology clients in all stages of growth.
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"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
Venture Economics, a Thomson Financial company, is the foremost information provider for equity professionals worldwide. Venture Economics offers an unparalleled range of products from directories to conferences, journals, newsletters, research reports, and the Venture Expert™ database. For over 40 years, Venture Economics has been tracking the venture capital and buyouts industry. Since 1961, it has been a recognized source for comprehensive analysis of investment activity and performance of the private equity industry. Venture Economics maintains long-standing relationships within the private equity investment community, in-depth industry knowledge, and proprietary research techniques. Private equity managers and institutional investors alike consider Venture Economics information to be the industry standard. For more information about Venture Economics, please visit www.ventureeconomics.com.
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