Survey: Q104 VC Investments Ease Off

April 27, 2004 (PLANSPONSOR.com) - The pace of venture capital placements eased during the first quarter of 2004 over the prior three-month cycle with a total of $4.6 billion going to 618 companies.

The latest quarterly survey sponsored by PricewaterhouseCooper showed that the Q104 figure lagged the $5.2 billion fourth quarter 2003 tally, but outpaced the numbers from the January to March 2003 period with its $4.2 billion total. Also sponsoring the survey were Thomson Venture Economics, the National Venture Capital Association and MoneyTree.

“Optimism is becoming pervasive as opportunities for liquidity events improve, especially in the Life Sciences sector,” Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said in a news release. “Entrepreneurs are still under pressure to make dollars work harder, but capital is flowing in at a healthy rate. It’s the kind of market that can generate successful companies and sustainable returns.”

Life sciences companies (biotechnology and medical devices, together) continued to dominate other industries as they have for the past six consecutive quarters. Investments in the sector totaled $1.3 billion, or 27% of all venture capital, according to the survey. Proportionately, life sciences investing remained near its 12-year high reached in 2003. Biotechnology alone accounted for $943 million or 20% of all investing, while medical devices garnered $325 million or 7%. A total of 71 Biotechnology companies and 51 Medical Device companies were funded during the quarter.

The software industry inched back into the top slot in the first quarter of 2004 as the single largest industry category after being pushed into second spot the last two quarters by biotechnology. Software companies garnered $956 million going to 162 firms, down slightly from the prior quarter. Telecom investments were up slightly in Q1 2004 from the prior quarter in terms of both dollars invested and the number of deals, with $547 million going to 65 companies.

First-time Deals

First-time financings were essentially flat, despite anecdotal buzz of a resurgence, the survey found. A total of 158 companies received their first-ever round of venture capital in Q1 2004, down from 186 in the prior quarter. However, they represented 26% of all companies receiving funding in the period, about the same proportion as in the prior quarter. Similarly, they accounted for $886 million in first quarter or 19% of all dollars, about the same percentage as in the fourth quarter of 2003.

Nearly one-third of all first-time financing dollars went into the software industry. While the number of software companies receiving funding for the first-time remained stable in Q1 2004 from the prior quarter, the dollars invested increased by 50% to $279 million. Likewise, the number of first-time companies in the biotechnology industry was similar to the prior quarter. However, dollar funding dropped to $89 million, down 50% from the prior quarter and below last year’s quarterly average. The semiconductor and telecommunications industries followed, receiving 10% and 9%, respectively, of first-time funding dollars.

The proportion of companies receiving funding at each stage of development has steadily drifted toward later stage companies during the past two years. Over the same period, the average time between financing rounds has increased while the average dollar amount of funding has decreased. With few exceptions, entrepreneurial companies are doing more with less, and for longer periods, the survey concluded.

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