Cold feet for venture capitalists, as downward trend continues

Venture capital investments fell for the third consecutive quarter as the year came to a close, marking a trend that hasn't been seen for at least five years, according to a joint-survey released Wednesday by PricewaterhouseCoopers MoneyTree and VentureOne.

Fourth quarter investments fell to $13.7bn, an 18 percent drop over the previous quarter. Meanwhile, the 853 venture rounds financed represented a 9 percent sequential decline, according to the survey.

"All of us have slowed down our deals. There is a thought that venture firms want to avoid risk and that's why the deals have slowed down. But it's been because of the valuations. If valuations are going up real fast or down real fast, the deals will slow. The last thing you want to do is be the guy who paid the high price," said Stewart Alsop, a general partner with New Enterprise Associates.

But while fourth-quarter financings were a continuation of the 6 percent consecutive drop posted in third quarter and an 8 percent quarter over quarter decline in the second quarter, the year overall set a record. Last year, $68.8bn was invested in venture-backed companies -- up 80 percent over the previous year.

"One thing to keep in mind is a new record was set last year," said Tracy Lefteroff, global managing partner of PricewaterhouseCoopers venture capital practice.

Last year, however, got its jump start from the surge in deals during the first quarter. But as the markets began to crumble in the second quarter and Wall Street's love affair with IPOs became tempered, venture capital also began to tighten.

And by the fourth quarter, Internet-related deals fell to $11bn invested, compared with $16.6bn in the first quarter. The industry, however, performed well for the year, racking up $56.9bn in investments -- nearly double the previous year.

Venture capitalists and industry watchers say the first quarter may not bring a reprise.

"I don't think the first quarter will out do the first quarter of 2000. There's no way given where the public markets are at," Lefteroff said. "I do think things have levelled off and we may pace the 1999 levels this year. But I'm not sure we'll outpace 2000."

Alsop agrees. He said there is no shortage of money coming into venture funds or deals. He added the only thing to stop venture firms from financing deals will be in determining what valuation to assign companies.

Industries that are expected to continue to remain in favor include the telecommunications, fibre optics and Internet infrastructure companies, Lefteroff said.

"I expect these areas will continue to remain fairly robust," he said.

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