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Loosening The Grip On VC Funding

VC investments were lower in the second quarter than the first, but if the recent trend continues, 2002 could still be a solid year.

Venture capitalists are still holding on tightly to their dollars, but there are signs they may be loosening their grip.

VC investments in the second quarter of 2002 were at their lowest level since the third quarter of 1998, but if the current trend continues, this will still be a good year for VC investments--falling behind only the economic boom of the late 1990s and 2000, according to the quarterly PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey. Investors pumped $5.7 billion into 819 startup ventures in the second quarter, an 11% decrease from the $6.4 billion invested in 826 companies in the first quarter of this year. "It seems to be bottoming out," Tracy Lefteroff, global managing partner of the venture-capital practice of PricewaterhouseCoopers, says of the drop-off in VC funding that began more than a year ago.

The software industry continues to top the scales, pulling in $1.0 billion--the largest amount of any sector. That's a 16% drop from the first quarter, when the sector received $1.2 billion. Of the software subsectors, security, business applications, and ERP top the list. "VCs weren't that interested in security before," Lefteroff says. "Now they all want a play in that area." Meanwhile, Lefteroff says, ERP, which had lost its luster during the Internet boom, is once again on the top of investors' lists.

Computers and peripherals gained 6%, to $185 million, and the IT services sector jumped 45%, to $360 million, rebounding from a large drop in the previous quarter. All other major sectors experienced declines. Semiconductor investments fell 31%, to $284 million, and telecommunications fell 16%, to $657 million. Much of those losses were made up for by the life-sciences industry, which received the second-highest amount of funding and for the first time ranked higher than telecom and networking companies.

While VCs are still putting large portions of their investments into their existing portfolio companies, Mark Heesen, president of the National Venture Capital Association, says that they shouldn't stop looking for new companies that will bring them rewards in five to seven years: "Patience continues to be required by all parties."

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