US VC investment resumes downward trend

Figures published by the PWC MoneyTree survey suggest that recovery in the US VC investment is still some way from recovery, although early stage investments have shown some resilience.

US venture capital investments in the first quarter of 2002 have shown a 24 per cent on the previous quarter, dampening hopes that the tide was starting to turn on two years of almost continuous decline.

The MoneyTree survey reports that a total of $6.2bn was invested in US venture-backed firms in Q1, with deal volume also falling to 787 investments against 994 in Q4 2001. Investment levels are now comparable to those seen in 1998, the last pre-bubble year.

Some analysts had reckoned on an upturn in VC investments, reflecting signs of recovery in the public markets as well as improved figures for VC investment in Q4 2002. But Tracy Lefteroff, global managing partner of the VC practice at PricewaterhouseCoopers, which carried out the report with Venture Economics and the NVCA, believes that this was premature: 'The public markets appeared to be recovering late last year, but they were disappointing in the first quarter, especially the IPO market.” She added that a sustained recovery was unlikely until technology spending by corporations increases and liquidity options improve.

There was brighter news for early stage investments, which have increased market share despite the latest downturn. Early stage companies attracted 19 per cent of total capital invested, and comprised 26 per cent of deals compared to 16 per cent and 23 per cent, respectively, in the fourth quarter of 2001. The category of IT Services witnessed the largest decline, falling 45 per cent to $235m.

A number of industry sectors also bucked the investment trend. The medical manufacturing and the semiconductors industry showed some resilience, each remaining at $409m. Media & entertainment increased 22 per cent to $371m. Computers & peripherals experienced a gain of 48 per cent to $192m.

Mark Heesen, president of the American National Venture Capital Association believes that the current market represents a return to a more measured approach to venture capital investment: 'Venture capitalists are back to their normal modus operandi, which is being extremely selective about new investment opportunities and working to build companies that offer sustainable value.'

The latest results for VC come on the back of a report from US advisory firm Cambridge Associates, which released performance data for 2001. The figures showed an 11.4 per cent fall in private equity fund net pooled returns while venture capital fund net pooled returns fell 38.9 per cent. The report did however suggest that returns are slowly increasing.