Official: the tech bubble is over

US venture capital investment has fallen to its lowest levels since Q3 1998, the first time in four years that investment has fallen to pre-bubble levels.

The latest data released in the US has revealed that US venture capital investment fell by eleven per cent in Q2 2002 to stand at $5.7bn, the lowest level since the boom in technology investments that started in 1999.

The figures, published by the National Venture Capital Association (NVCA) in association with Venture Economics and Pricewaterhouse Coopers show that a total of 819 companies received an average of just under $7m per investment, in line with figures for 1998.

According to Tracy Lefteroff, global managing partner at Pricewaterhouse Coopers’ venture capital practice, the results were in line with forecasts. “As expected, total investments for the year 2002 will be well below 1999, the first of the bubble years. However, 2002 is still likely to be the fourth largest year ever for venture investing.”

The rise and subsequent fall in US VC investment has been dramatic. At the beginning of 1999, VC investment stood at $6.4bn, an average of $7.62m for each of the 842 companies receiving investment. In just over a year, this had rocketed to $28bn (Q1 2000), when 1800 companies attracted an average of $15m per investment.

Overall venture capital investment in 2000 reached the $100bn mark. 2002 is likely to produce total investment levels more comparable with 1998 ($20bn). Lefteroff attributes the drop in investment to a broader sense of unease about investment in the current climate. “This return to more normal historical levels reflects the uncertain economic environment, the weak IPO market and more realistic company valuations. The fact that the number of companies getting venture backing has scarcely decreased is a positive indicator of future activity.”

The most popular sectors for VC investment remain largely unchanged from Q1. The notable exceptions were in life sciences – particularly biotechnology ($958m) and medical devices ($556m, a 43 percent increase on Q1), which managed to increase their allocation in a declining market.

Mark Heesen, president of the NVCA said: “VCs today must be able to continue to preserve capital and support their existing companies that are weathering the storm. Yet, they must also find the new companies that will be the winners five to seven years from now. History tells us that some of tomorrow's most successful companies will be funded during today's down cycle.”