Venture capital investment in internet-related start-ups reached $640m in the first three months of 1998, according to PricewaterhouseCoopers’ engagingly named Money Tree Survey. That figure represents a 54% increase over the same period in 1997. It’s an incredible amount of money for internet-related ventures, observes survey director Kirk Walden. Walden suggests that the VC surge may be a more accurate reflection of the value of internet companies than a more pessimistic press. These people are putting their money where their mouth is, whereas industry pundits may not be, he says. Anyone who invests that sort of money must be at least a partial believer. That’s not to say investors aren’t hedging their bets, and heavily so. As Walden points out, VCs invariably manage a portfolio of companies for their fund. Some of those companies will go bust, he says, some will just limp along for a while. And some will go off like a rocket. If the VC’s managers have chosen wisely, the few companies that go ballistic should more than make up for the fizzers. On evidence, Walden says VCs are choosing well. Investors in Hotmail Inc made 15 to 25 times their original investment in an 18-month period. It doesn’t take many of those to make your portfolio look very nice, thank you very much, says Walden. While Hotmail is clearly exceptional, less spectacular ascensions still provide handsome ROI. The average internal rate of return for venture capital funds is 30% to 40%, so they’re not doing too badly, Walden observes, even if they were making less than that, they’d still be ahead of the market, and the market is doing sensationally well. PricewaterhouseCoopers remains boosterish about what many have labeled a bubble economy, built on hype. The Money Tree Survey found that VC investment in technology is growing at 50% per year, twice as fast as investment in non-technology startups. Within technology, internet companies are the fastest-gaining sector, while within the internet sector, Walden says VCs are favoring infrastructure companies. They are looking for enabling software, a sort of moral equivalent of applications. This is an underrated category, he claims, that kind of investment is not perhaps as visible to an end user but the sales potential is extraordinary. Growth has yet to falter. PricewaterhouseCoopers is in the midst of the second quarter overall study and Walden says: We have no indication that investments are slowing at all. For calendar year 1995, total VC investments came to about $7.5bn. For 96, the figure was $9.5bn. In 97, it was $12.5bn. That’s three records in a row, remarks Walden, adding that this year’s figure could pass $15bn. The money is going almost exclusively into private companies with a business plan to grow to $50m to $100m worth of business in two to three years, Walden concludes. It’s a bottom-up kind of investment.
