What Will Win With VCs In '02? Look At '01What Will Win With VCs In '02? Look At '01

The same technologies that sizzled with venture capitalists in 2001 are likely to do so again in 2002.

Sure, the stock markets warmed to tech-stock debuts in December, and the economy shows signs of shrugging off its malaise. There have even been hints that corporate profits--a key to increased spending on the products venture-backed startups produce--are rebounding. But none of that is apt to change much about the technologies VCs will target this year.

In the VC realm, the same drum beats: back to basics. The technologies that seem poised for investment popularity in 2002 include business software, broadband, and software for Internet infrastructure. Also drawing VC dollars: Life sciences such as genomics and bioinformatics. VCs are still spending most of their time and investment dollars on companies already in their portfolios rather than looking for new ones to back.

There's one twist. "You're going to see basic technology development rather than companies applying existing technology in new ways," says Kirk Walden, national director of VC research at PricewaterhouseCoopers. Money will favor entrepreneurs who have come up with something from scratch over simply rebundling or commercializing something that's already in use. An easy example is application service providers, Walden says. "What's attractive about a new ASP is the underlying software, the application it's providing, not the fact that it happens to be an ASP."

One industry group has a positive outlook for the coming year. "Large technology companies have been limiting their spending on new technology, and that has hurt the type of company that VCs normally invest in," says a spokeswoman for the National Venture Capital Association. "The hope is that inventory levels are lower again and larger technology companies will start buying again." So watch the fourth-quarter results of Intel, Oracle, Sun Microsystems, and other blue chips for signs of improvement.

Another thing to look for in early 2002: a continued trickle of initial public offerings, which give investors the chance to cash out their investments, even though Lawson Software, Nassda, and NetScreen Technologies all went public last month with better-than-expected results.

Because venture investments typically lag six months to 12 months behind the stock market, it could be a while before startups reap the benefits of VC investments in anticipation of IPOs. There are lots of potential IPO companies in the pipeline, Walden says. "Even when the market opens up, it will be very selective."