VCs' Investment In IT Continues To SlideVCs' Investment In IT Continues To Slide

Venture capitalists continue to shy away from investing in IT. But there are signs suggesting that VC investments in IT may soon begin to climb. Still, for the 14th straight quarter--dating back to early 2000--the amount venture capitalists have pumped into IT firms has declined, according to the quarterly Ernst & Young/VentureOne Venture Capital Survey released Monday.

In the most recent third quarter, VCs invested $1.98 billion in IT firms, down from $2.30 billion in the second quarter and $2.93 billion a year earlier. VC investments in IT peaked during the first quarter of 2000, when nearly $15.46 billion was invested. One bright spot: information-services firms, which saw investments more than double to $186.9 million, up from $74.61 million in the second quarter and $85.8 million from the third quarter of 2002. But, as VentureOne manager for research operations Amity Wall notes, information services represents a small fraction of overall IT investments.

Yet Wall sees other signs that a reversal in VC investments could occur soon. For instance, she cites that among IT companies, the number of early-stage deals rose slightly, to 69 from 66 in the past quarter, though that's still way below the 96 deals funded a year ago.

Although overall VC investments remained flat at about $4 billion, the number of initial public offerings are on the upswing. In the past quarter, six venture-backed companies completed IPOs, compared with only two for the entire first half of 2003. The single largest IPO was for SigmaTel Inc., an Austin, Texas, developer of integrated circuits, which raised $105 million. In addition, 19 venture-backed companies registered for IPOs this quarter, the largest number of registrations since 2000.

The upsurge in tech stocks--the information 100 index has more than doubled in the past year--could be a precursor to venture capitalists investing more heavily in IT in the near future. "There's usually a lag time between the investments of private and public investors," Wall says. "Venture-capital investors want to validate the trend and see whether or not it's a fad or an established trend."