VC Investment Falls for Third Straight Quarter

By Larry M Edwards, Web Editor
Thursday, 05 April 2001

SAN DIEGO — Venture capital investment in the United States fell for the third straight quarter, with early-stage deals being hit hardest, according to figures released this week by New York-based VentureWire Group.

San Diego bucked that trend, however. While there were only about a third of the deals of a year ago, there was actually more money invested in the first quarter of 2001 than the first quarter of 2000, according VentureWire.

Locally, the first quarter of 2001 saw 11 companies receiving a total of $300 million, whereas in 2000 there were 29 venture fundings in San Diego, but the total dollar amount was $239 million. The difference, explains Ken Andersen, managing editor of VentureWire Group, is the $100 million invested in PacketVideo and the $54 million that went to Syrrx Inc.

In addition, what are known as PIPEs (Private Investment in Public Entity) are outpacing initial public offerings and secondary funding markets for small-cap and mid-cap companies, according to San Diego-based PlacementTracker.com, a division of DirectPlacement.com Inc., an investment bank and data research firm.

PlacementTracker lists a half-dozen companies that raised $76.9 million through the private placement of common stock. Biotechnology companies scored the most funding, with La Jolla Pharmaceutical Co. landing $35.3 million and Ligand Pharmaceuticals Inc. receiving $24 million. Third on the list was Sorrento Networks Corp., which obtained $10 million through a combination of stock placement and warrants.

Nationwide, a total of 1,051 private companies have raised $14.5 billion in venture capital, down significantly from last year's first quarter total of 1,855 companies raising $27.7 billion, according to VentureWire. The number of investments was down at all stages, but early-stage deals were hit hardest, falling by nearly half to 327 from last year's first quarter mark of 656.

These totals mark the third straight quarterly decline in U.S. venture-capital investment. Investment totals have not declined for three consecutive quarters in the U.S. since the period following the October 1987 stock market crash, VentureWire says.

"Venture capitalists are not thinking about new investments," says VentureWire's Andersen. "They are spending their time — and money — on saving the companies in their portfolios."

The first quarter totals suggest venture capitalists will invest around $47 billion in 2001, a total well off last year's sum of $108 billion, but 15 percent greater than 1999.

"We're still running way ahead of the last sane year on record," adds Brian O'Connell, VentureWire publisher. "What these numbers represent is a chastened but still healthy venture-capital industry."

The results are based on daily investment totals recorded by VentureWire and published in the VentureWire Index (VWIX), which tracks overall private equity investment on a daily basis.

During the first quarter, the VWIX fell 30 percent, reaching its 52-week low on March 21. In contrast, during the first quarter of last year, the index rose 53 percent as the Internet boom neared the top. Currently, the VWIX is at its lowest level since the fall of 1999, officials say.

Some sectors were more resilient than others. The index for networking hardware companies declined just 5 percent over the quarter, and the wireless index actually rose 16 percent. By contrast, the rate of investment in Internet services companies declined 35 percent over the quarter. VentureWire's industry indices track daily investment in private companies in seven industry sectors.

But the lackluster investment climate is fueling the PIPE market to a degree. During the first quarter of 2001, a total of $2.2 billion was committed to public companies through the sale of 167 PIPE offerings nationwide, according to PlacementTracker.com.

Although this is much less than the almost $8 billion was committed to public companies through the sale of 375 PIPE offerings during the first quarter of 2000, PIPEs are still out-pacing the IPO market, says Brian M. Overstreet, president and co-founder of PlacementTracker.com parent DirectPlacement.com.

"Despite a dismal general market environment and a virtually non-existent IPO and secondary market, the PIPE market once again emerged during the first quarter as the leading provider of equity capital for small-cap and mid-cap public companies," Overstreet says.