2001 VC investment data paints bleak picture

The latest data on VC investment in the US reveals a massive drop in volume and value with only a few sectors not profoundly effected..

Data just released by research group VentureOne reveals that investment by venture capital firms in US companies dropped from a record $91.6bn in 2000 to $32.1bn in 2001 – a 65 per cent reduction.

In the first half of 2001 $19.2bn was invested – an indication that VC firms had already retreated from the preceding year's investment binge – but that figure dropped to just $12.8bn for the second half. September 11 clearly made many freeze their commitments entirely.

The total first round investments made fell from 2,372 in 2000 to just 777 a year later and the value of these investments slumped from $26bn to $6bn. Second round funding dropped 53 per cent to $10.8bn and later stage funding declined to $10.3bn – a drop of 55 per cent.

Particular sectors that were hard hit included retailing [an 88 per cent drop to $245m], products and services [down 80 per cent to $5.3bn] and information services [down 79 per cent to $1.9bn]. Others somewhat less hard hit included software down 59 per cent at $7.3bn but most notably healthcare [down 36 per cent at $5.5bn], biopharmaceuticals down 22 per cent to $2.8bn and medical devices which dropped by 'only' 15 per cent to $1.6bn.

As VC firms review their investee companies it's clear that many are expecting to have to spend significant amounts of time and money to nurse them to profitability. Some portfolio companies are going to find their investors deciding to cut their losses and will face closure, whilst the rest are going to have to work extra hard to extract the funding they need on terms they can accept. With valuations having dropped massively, both company management and VC firm are struggling to agree on what many of these businesses are worth.