VC Money Trickles Back

A recent venture capital survey conducted by VentureOne and sponsored by Ernst & Young says U.S. VC funding may be back on the uptick

Just over $3 billion was spent in the United States on information technology by VC investors in the second quarter of 2004, spanning 294 financing rounds, says the Ernst & Young/VentureOne Quarterly Venture Capital Report. That's up from $2.75 billion spent in the first quarter, which was spread more thinly in 307 rounds.

While investment is up overall, it's still a far cry from the dotcom bubble levels. The $5.8 billion over 601 rounds in the first half of this year was higher than the $5.3 billion in 609 rounds for the first half of 2003, but well under the first half of 2002's $7.2 billion in 692 rounds. As for 2000, if you find it shocking, then you weren't there: $31.2 billion in 1,995 rounds.

For IT deals, the second quarter of this year also saw a median round of $8 million. That makes it the third consecutive quarter of growth and the highest median since the second quarter of 2001, which was also at $8 million. Broken down by industry sector, 2004 second-quarter medians were $10 million for communications and networking; $10.1 million for electronics and hardware; $5 million for information services; $10 million for semiconductors; and $7 million for software.

Communications and networking companies were among the biggest VC deals of the quarter. The fattest round for the second quarter of 2004 was $122 million for the financial analysis/management firm, RiskMetrics Group. Force10 Networks enjoyed the next biggest haul, with $75 million; and $70.1 million went to Mahi Networks.But despite these sizeable deals, evidence indicates that VCs remain cautious of the communications market.

"For the first time ever, the level of semiconductor deal flow equaled the numbers in communications," wrote John Gabbert, VP of research for San Francisco-based VentureOne. "As far as communications, it's the lowest we've seen since the mid-1990s Software does continue to be the bellwether area for IT investments."

Gabbert says that software companies are finding bargain acquisitions. "The companies that are successfully able to raise a substantial amount of venture capital investing are doing so at... fairly good-sized rounds across the board." He says this trend can minimize the risk in successive rounds, which are, in turn, coming at longer intervals.

On the "no duh" front, the report shows that California dominates the number of financing rounds, not just for Silicon Valley but also for the healthcare, retail, and "other" categories, with 417 rounds of VC financing totaling $4.83 billion in the first half of 2004. Massachusetts is second with 129 rounds totaling $1.38 billion, and Texas is a distant third at 60 rounds totaling $532 million.

Seven states -- Delaware, Maine, Mississippi, Nebraska, Nevada, South Carolina, and West Virginia -- joined Washington, D.C., as places with no VC deals so far this year.Apart from Google's coming public offering, Gabbert believes nothing on the horizon is expected to greatly influence the IT investor economy in the near future.

— Evan Koblentz, Senior Editor, Next-Gen Data Center Forum

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