US venture capital investment has shown signs of a recovery for the first time in 18 months, according to the MoneyTree Survey, recently published by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association (NVCA).
$7.1bn were invested in US growth businesses in the fourth quarter of 2001, taking the year’s total to $36.5bn and ranking the year as the industry’s third most active in history.
Tracey Lefteroff, global managing partner of the PwC’s venture capital practise, said calendar year 2001 investment was nearly double the level recorded in 1998, the last year before the technology bubble. “The free-fall is over and we’ve landed safely on higher ground. The uptick in dollars and deals in the fourth quarter occurred despite economic disruption and uncertainty. The stars have realigned along historical norms.”
Lefteroff’s bullish assessment will interest investors in vintage 2000 and 2001 venture capital funds. Many will welcome the beginning of a recovery, but some will argue that the real question about recent venture funds is about lack of performance and argue that the jury is still very much out on these funds. The notion of a safe landing may strike such investors as premature.
Mark Heesen, president of the NVCA, also spoke optimistically about the survey's significane, saying that Q4 of last year marked the end of 18 months of VC preoccupation with nursing portfolio companies as opposed to making new investments. “We are beginning to see a shift in how venture capitalists are spending their time. During the past year, venture capitalists demonstrated a great deal of tenacity, working side by side with entrepreneurs to build strong companies at a time when exit strategies were very limited. These efforts will serve new businesses well as the economy begins to recover.”
In terms of new investment in the fourth quarter of 2001, life sciences continued to grow and captured 18.5 per cent of total investment, compared with 7.9 per cent in Q4 2000 and 6.42 per cent in the same period of 1999.
Software remained the strongest sector, raising its share of new investment to 22.5 per cent. Telecommunications and networking and equipment were described as sectors “holding their own.”
Jesse Reyes, Vice President of Venture Economics, said that whilst VCs had returned to doing deals, they approached new investments with more caution. Referring specifically to the life sciences sector, Reyes said: “What is really telling as to the industry’s new view of the world is that […] initial investments are now averaging $7m per company rather than the $10m of the typical mid-2000 deal. This may be a reflection of valuation reality or simply a way to lower the risk exposure.”