Report: U.S. Venture Capital Investment Falls 60 Percent in Q3

Venture capital investment in the United States plunged in the third quarter, with overall funding for fledgling companies down by more than 60 percent so far this year, according to figures released Monday by VentureWire, a service that tracks private equity funding.

"There is quite a bit of uncertainty in the VC community looking toward the fourth quarter and into 2002," said John Fuller, managing editor of VentureWire. "But the fundamentals of venture capital investing, and the high-tech economy, remain strong."

E-commerce companies did not fare well in the third quarter, according to VentureWire, with only nine business-to-consumer (B2C) companies receiving VC funds (a total of $56.56 million).

As for business-to-business (B2B) firms, 18 got $144.43 million, VentureWire said. Also on the e-commerce front, 16 online health companies accounted for $230.8 million in funding.

Overall, 540 companies raised a total of US$6.7 billion in VC funds during the quarter ended September 30th, down from $23.9 billion raised by 1,634 companies in the same period last year, according to VentureWire. In the second quarter, 880 companies raised $9.6 billion.

"With investors taking a break over the summer and the economy weakening, the third quarter was already shaping up to be a down quarter," said VentureWire editor Ken Andersen. "But with the events of September 11th, the industry slowed down even more in the last few weeks of the quarter."

On Pace with '99

For the year to date, $29.2 billion in venture capital has gone to 2,360 companies, down from $76.9 billion in funding for 5,191 deals in the same period last year, VentureWire said.

However, 2001 funding is ahead of 1999's pace, VentureWire said. In the first three quarters of that year, $21.6 billion was provided for 2,240 deals.

"This year remains on track to see 3,000 deals raise $35 million," Fuller said. "That would put it just below 1999 totals and well ahead of any prior year."

Tech Solid

Many technology companies obtained funding -- within the enterprise software, hardware and networking sectors in particular -- according to VentureWire.

VentureWire said that enterprise software companies saw more than $720 million in deals funded during the quarter. Other software companies were funded as well, to the tune of $790 million.

Networking hardware saw more than $1 billion in deal flow, and optical networking $885 million. These sectors "remained solid targets for venture capital investments" during the quarter, VentureWire said.

In addition, biotech companies raised a total of $680 million, the company said.

IPO 'Chokehold'

Meanwhile, the September 11th terrorist attacks on the United States have "put a chokehold" on initial public offerings (IPOs), IPOFinancial.com president David Menlow told the E-Commerce Times.

"Valuation models are really somewhat nebulous at this point," he said.

Since venture capital is often a prelude to an IPO, the third-quarter figures provide an indication of the direction of the IPO market.

PayPal Steps Up

On Friday, online payment service PayPal filed with the U.S. Securities and Exchange Commission to sell shares in an IPO. However, Menlow said that the filing is not necessarily a sign of good things to come.

"I would not view an IPO filing as anything indicative of a change in sentiment," Menlow said.

What is more important, the analyst said, is whether deals already in the works will need to be revalued. Menlow also said it is still too soon to tell when technology investment will pick up.

"I don't believe the IPO market can survive any meaningful rally if the tech sector is not a participant," Menlow said.

Around the Track

VentureWire tracks investment in 16 industries, basing its figures on daily investment totals.

The VentureWire Index, which tracks private equity investment on a daily basis, fell 30 percent in the third quarter, closing below 500 for the first time in two years. In the summer of 2000, the height of the dot-com boom, the index topped 1,700.

There are some bright spots amid the venture-capital drought. High-end e-tailers Blue Nile and Winetasting.com, which cater to consumers who have money to spend, have been successful at raising funds this year.