Funding for startups

VC Activity Continues to Crawl

Think venture capitalists might be ready to inject some cash into the sputtering technology economy? Think again.

The venture capital business continued a two-year slump during the first quarter of this year. The money invested by VC firms decreased significantly, as did the number of deals and the amount of money poured into VC funds by limited partners.

Networking equipment companies, including data communications and fiber optic equipment manufacturers, raised $899 million in 66 deals during 1Q02, according to the MoneyTree survey published by PricewaterhouseCoopers, National Venture Capital Association, and Venture Economics. A year ago, that sector attracted $1.99 billion in 114 deals.

The telecommunications sector, which includes wireline, wireless, and satellite communications companies, raised $722 million in 87 deals, compared to $2.31 billion in 165 deals a year earlier, according to the MoneyTree survey.

The companies that did raise large rounds of funding during the first three months of 2002 often did so after firing employees and washing out their earliest investors (see Washout Rains $53M on Pluris and Caspian Starts Fresh With $120M).

Table 1: Largest Financings of 1Q02
Name Stage of Development Amount Raised
Caspian Networks Expansion $120,000,000
Chiaro Networks Expansion $80,000,100
Atrica Inc. Expansion $75,000,000
Turin Networks Inc. Later Stage $58,000,000
Polaris Networks Expansion $55,000,100
Pluris Inc. Later Stage $53,000,000
P-cube Inc. Expansion $40,000,000
Source: PricewaterhouseCoopers, Venture Economics, National Venture Capital Association

Money coming into venture capital funds was scarce, too, compared to previous years. Limited partners only committed about $2.3 billion to VC funds in 1Q02, the lowest quarterly amount on record since the third quarter of 1996, according to VentureOne.

Table 2: Commitments to Venture Capital Funds
Quarter Amount ($M)
1Q02 $2,252.00
1Q01 $18,403.60
1Q00 $16,660.27
1Q99 $7,906.55
Source: VentureOne

Along with fewer commitments to their funds, VCs are feeling increased pressure from limited partners regarding the gigantic management fees they draw down, even on funds that they don't fully invest. Kleiner Perkins Caufield & Byers and Accel Partners are among those VCs that have recently chopped the size of their funds (see VCs & Startups Go to the Mat ).

Blueprint Ventures sent a memo to its limited partners in mid-April saying that, due to concerns about the VC business, they were working to reduce their management fees. "Again, our mandate is simple: increase returns to our investors in this difficult time," states the memo, which was leaked to the media.

"The industry consensus is that we are either at or near the bottom -- that's the good news," says Steve Bengston, managing director of emerging company services, at PricewaterhouseCoopers. "The bad news is that most don't think it will go substantially up from there until the next boom emerges."

— Phil Harvey, Senior Editor, Light Reading

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