A Mixed Q4 for Funding

Mar 04 2001

Shed no tears for the young and the entrepreneurial. Venture capital funding is decreasing fast, but far more money is still flowing than at any time except last year.

Venture-backed funding in the fourth quarter of 2000 was almost three times as large as funding two years earlier. And that total - $13 billion - nearly matches the $15 billion raised for the entire calendar year of 1998, according to VentureOne.

But a downward trend is still a downward trend. If you guessed that fourth-quarter venture funding would produce significantly lower totals than earlier in 2000, you were dead-on. Investors decreased funding to Net companies by more than $3 billion in the fourth quarter, according to joint research by VentureOne and PricewaterhouseCoopers. Less-optimistic estimates from Venture Economics show that investors slashed funding by almost $6 billion over the same period.

Still, venture-backed firms are securing investment dollars at a higher rate than they did in the third quarter of 1999, a time when optimism was much higher.

Growing investor conservatism is quickly changing who gets capital and at what stages. Although Internet firms still raise almost three-quarters of all venture cash, health care and biotech firms are pulling in more than ever. Meanwhile, Net startups are finding it more difficult to raise capital. Barely more than 50 percent of the early-stage seed-and-startup capital raised in the fourth quarter went to Net companies, compared with nearly 80 percent a year earlier. And even though onetime darlings in the content and e-commerce fields pulled in less than 4 percent of financing, the Net infrastructure sector has yet to witness a downturn.

In fact, it now accounts for more than 30 percent of venture capital investment.

California has seen an especially steep decline in funding, possibly because the high cost of living and doing business in the state is less attractive to penny-pinching investors. Startups in Los Angeles and Orange County raised 23 percent less capital in the fourth quarter of last year, while Silicon Valley-based companies garnered 27 percent less, according to PricewaterhouseCoopers.

Indeed, only el cheapo Austin, Texas, and flinty New England raised more venture capital last quarter than in the third quarter.

Go East, young investor!