U.S. venture capital funding shows signs of slowing

The U.S. venture capital industry saw a decline in quarterly investment for the first time in 2 years despite spending $25.9 billion on 1,774 companies, according to a recent report.

Venture capital investment dropped to $25.9 billion for the third quarter of 2000, compared to $27.7 billion in the immediate prior, second quarter, according to a report published Nov. 3 from Venture Economics and the National Venture Capital Association (NVCA).

Nevertheless, venture capital companies have invested a cumulative total of $79.9 billion during the first three quarters of 2000, compared to $33.7 billion for the first nine months of 1999. That's a 137% jump, the NVCA said. The NVCA represents more than 420 venture capital and private equity firms.

Since about the fourth quarter of 1999, venture capitalists have shifted their interests somewhat away from e-retailers, business-to-commerce companies and business-to-business companies, said Jeanne Metzger, NVCA director of marketing.

Instead they are turning to infrastructure plays that support the physical growth of the Internet, such as companies that focus on bandwidth, fiber optics and wireless, Metzger said. With such an intense focus on Internet-related companies in the past couple of years, venture capitalists also are opening their eyes more to ventures outside of the sector, such as bio-technology and the medical health care sector, she said.

For the third quarter ending Sept. 30, Internet-specific ventures saw their share of the entire venture capital investment pie decline to 44.55%, down from 50.12% in the same quarter last year. In real dollars, that is $11.5 billion for 761 companies. Communications companies, meanwhile, received 18% of the total, or $4.5 billion for the quarter, shared among 220 companies, NVCA said.

A total of 298 computer software companies shared $3 billion, with an average investment of $10.1 million. That represented 11.6% of the total funds doled out, according to study.

Venture capital spending has not witnessed a quarter to quarter decline since the third quarter of 1998, Metzger said.

Less than 20% of investments during the quarter went to early-stage companies, while companies using venture capital to expand their existing businesses received 56.4%, the study concluded.

Northern California - home of Silicon Valley - continues to attract more than 30% of all venture investment in the U.S., according to the quarterly findings. Second place, however, is a battle between New England, with 10.78%, and New York, with 10.84%.

The Southeast saw the greatest increase for the quarter year over year, seeing investment increase 213%. The Rocky Mountains, greater New York, New England and the Great Plains all witnessed growth of more than 125%.

NVCA, in Arlington, Va., is at www.nvca.org/.