By John Rogers
Venture capital investments surged to a record high $7.67bn during the second quarter of 1999, more than double the $3.77bn invested in the year-ago period, according to a survey by PricewaterhouseCoopers. The total value of VC investments also dwarfed the previous record high of $4.31bn recorded in the first quarter of this year. Roughly half of the total for the record- setting quarter was poured into internet-related businesses, as that sector attracted more funding in the second quarter alone than in all of last year.
These numbers are incredible, said Kirk Walden, director of venture capital research at PricewaterhouseCoopers. Everything went right in the quarter. The appeal of the technology sector in general, and the internet in particular, was largely responsible for the surge in investments, according to the firm. Walden cited a slew of successful initial public offerings from internet companies earlier in the year and a strong US economy as key drivers behind the increased activity.
During the quarter, the number of companies receiving funds increased 30% from a year earlier to 992 – 417 of which were considered internet-related. At the same time, average funding per company rose 57% to $7.4m. The jump in average funding reflects the higher valuations and greater potential of technology companies as well as the increased competition in those companies’ markets.
Technology companies overall have garnered $10.5bn in funding in the first half of this year, compared to $10.8bn for all of last year. But it is the internet sector that has truly captured the minds and wallets of investors and Walden no longer sees that attraction as a passing fad. After sifting through the numbers for the quarter, he said the breadth of internet companies was striking. It’s beginning to shape up like a typical industry.
Formative stage companies, those in either the start-up or early periods of their development, took in 41% of the total dollars for the quarter and represented half of all companies receiving funding. Most of those companies have no product to sell yet, according to Walden, and represent investments that may only begin to pay off about 18 months down the line or so. Typically they account for only about 35% of the total companies that attract VC funding in a given quarter, he said.
On a geographic basis, most regions of the country set new records. Silicon Valley attracted $2.7bn in funding, breaking the $2bn mark for the first time. New England was second with $1.1bn. New York Metro, LA/Orange County, and the Southeast followed, in that order, each capturing more than $500m. In all, nearly $4bn was invested outside the traditional markets of Silicon Valley and New England and ten regions attracted more than $200m each in the second quarter.
The frantic pace of investment is not likely to continue in the current quarter, however. Even as venture capital firms aren’t expected to have any trouble raising more money over the next few quarters, most analysts believe the level of second-quarter investments is not sustainable. Walden projects that third- quarter figures will likely retreat to first-quarter levels, which he points out were a record high right up until the most recent numbers were compiled. The first-quarter total of $4.3bn is the equivalent of nine different companies receiving $5 or $6m each for every day of the quarter.
Even as Walden maintains that a new record probably won’t be set in the next 12 months, he relishes what happened in the second quarter. It’s a watershed, he said, if nothing else, it legitimizes VC as a key component of the economy.
