April 30, 2003 – Washington, DC – The continuous decline of venture capital investing persisted in 1Q03 with total investments of $3.8 billion, down from the prior quarter of $4.3 billion, according to the PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey. The semiconductor industry received $275 million distributed among 34 companies, a slight increase over the prior period.
A total of 623 entrepreneurial companies received funding in the first quarter compared to 726 companies in 4Q02. Industry leaders cited the uncertainty associated with the war in Iraq and the lackluster economy as prime contributors to the cautious investment pace.
In terms of dollars, investment in 1Q03 was the lowest since 3Q97. The number of companies receiving funding was the lowest since 3Q96, a six-year span.
Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said: “The reality is that venture capital will not lead the economy out of this slump. It will follow it out. Restoration of global stability appears to be underway. But, until the public markets and liquidity opportunities show signs of sustainable improvement, venture capital will not rebound.”
“Venture capitalists are investing at a prudent rate considering the economic and global uncertainty, lower private company valuations, investment opportunities and the current outlook for the IPO and M&A markets,” commented Mark Heesen, president of the National Venture Capital Association. “As uncertainty dissipates and corporate America feels more comfortable making capital expenditures on new technologies, the venture community will regain its confidence that new companies can find customers for their products.”
A total of 131 companies received venture capital for the first time in 1Q03, a drop from 180 in 4Q02. However, with $680 million, these companies commanded 18% of overall investment dollars, about the same as the prior quarter. This consistency was one sign that venture capitalists remain committed to balancing new investments with those in existing portfolio companies.
Additionally, the mix of industries receiving first-time venture dollars indicated that venture capital firms might be broadening their range of investing. Consistent with historical norms, new software companies accounted for the most deals and dollars, 43 companies and $200 million. However, in terms of number of companies, the semiconductor industry was No. 2, with 11 first-time financings. That was followed by the industrial/energy industry with 10 companies, and biotechnology and computers & peripherals with eight companies each. Only six telecommunications companies received first-time financing, an eight-year low for the industry.
Early stage investing held fairly constant, indicating that venture capital firms are staying the course. A total of 158 companies in the early stage of development attracted $665 million, or 17% of total investing, compared to 18% of total investing in the fourth quarter.
There was a slight shift to later stage investing as existing portfolio companies continued to mature without a foreseeable exit strategy. Investments in companies in the late stage of development accounted for $800 million, or 21% of the total, compared to 18% in the prior quarter. The increase in later stage investing came at the expense of companies in the expansion stage. Investments in those companies were $2.3 billion, or 60% of the total, down from 64% of the total in the fourth quarter.