Venture Capital Slowdown Is, Um, Slowing DownVenture Capital Slowdown Is, Um, Slowing Down

Don't panic--a 21% decrease in venture-capital investments during the second quarter isn't that bad after all. According to PricewaterhouseCoopers' quarterly MoneyTree survey, the rate of decline in startup investments is slowing--and venture capitalists are still investing more now than they were before the Internet bubble.

For the quarter ended June 30, 669 venture-backed companies received $8.2 billion in equity investments. That's 21% less than the $10.4 billion that went into 752 companies during the previous quarter, but the drop-off was favorable when compared with the previous quarter-to-quarter decline of 41%. "If you look at the amount of investment in the first two quarters of this year, we're still above what we did in 1998," says Tracy Lefteroff, global managing partner of PricewaterhouseCoopers' venture-capital practice. "The level of investment is healthy by historical standards."

That's not to say companies seeking seed capital should relax yet. While funding increased 8% for late-stage companies with previous VC backing, early-stage and seed investments--which usually consume half of all venture capital--accounted for just one-third of venture backing. Also seeing less green were the communications and networking sectors, where second-quarter investments fell to $1.8 billion from $3.0 billion the previous quarter, and Internet infrastructure companies, which saw investments drop 45%, to $1.3 billion.

Dave Witherow, president and CEO of VentureOne Corp., which helped put the report together, said in a conference call that the declines are evidence that the market is trying to regain its pre-Internet-bubble footing. During the Internet bubble, Witherow said, venture capitalists were responsible for 76% of equity funds raised by startups, whereas prior to the economic boom they were accountable for nearly all seed investments. Today, the VC community's share of such investments is on the rise, thanks in part to corporate equity investments falling to $353 million during the first half of 2001 from $3.8 billion during the same period last year. Says Witherow, "Professionally managed VC funds have been around for a while, but as the industry grew, so did the non-VC sources of investments."