VCs Put Tech Dollars Into Software And Services

What doesn't kill you makes you, at the very least, more careful. As a group, IT venture capitalists are a good example. U.S. venture-capital firms' investments dipped slightly in the third quarter, to $4.2 billion, according to the MoneyTree Survey conducted by PricewaterhouseCoopers, Thomson Venture Capital, and the National Venture Capital Association. After falling from a peak of $28.6 billion in the first quarter of 2000, VC spending has ranged between $4 billion and $4.6 billion for each of the past five quarters. For only the second time since 1997, software dropped to second place among industries drawing VC funds. Software companies received $819 million, down 11% from the previous quarter, making biotechnology the No. 1 draw.

Entrepreneurs with technology that helps business technologists maximize previous IT investments are enjoying the most interest from VCs. Accel Partners' Peter Fenton says software tools for monitoring, visualization, resource scheduling, and data recovery are getting more important as CIOs deploy cheap, scalable Linux and blade servers. And as companies look to install Web-services apps to connect customers and partners, there will be a greater need for management and security software.

According to the quarterly Ernst & Young/VentureOne Venture Capital Survey, the amount of money VCs have pumped into IT firms has declined for the fourteenth straight quarter. VCs invested nearly $1.98 billion in IT firms during the third quarter, down from $2.30 billion in the second quarter and $2.93 billion a year earlier. One bright spot: Information services companies saw investments more than double, to $186.9 million, up from $74.6 million in the second quarter and $85.8 million in the third quarter last year. But, as VentureOne manager for research operations Amity Wall notes, information services represents a small fraction of overall IT investments.

VC firms are heartened by the strength of the Nasdaq exchange, which posted an overall one-year return of 10.8% for the second quarter. Most venture-backed U.S. companies go public on the Nasdaq or are bought by companies listed there. The rise in share valuation for Nasdaq-listed firms gives them the currency for buyouts.