VC Industry Beset By Woes

January 29, 2002 ( - With one-time institutional backers staying on the sidelines, the US venture capital market saw the amount invested in US companies plunging 65% to $32.1 billion last year, from a record $91.6 billion in 2000.

Market research group VentureOne said VC executives had a hard time executing initial public offerings and lost financial support from one-time institutional backers.

First Rounds Hard Hit

One effect of the cash crunch: VC groups are increasingly allocating funds to existing investments, making it more difficult for start-ups to raise capital, according to VentureOne.

The number of first-round investments tumbled 65% from 2,372 in 2000 to just 777 in 2001, while the amount put into those first-round investments shrank 77% from $26 billion to $6 billion. Funding of second rounds fell 53% to $10.8 billion, while later-stage funding dropped 55% to $10.3 billion.
Investment in products and services collapsed 80% from $26.6 billion to $5.3 billion year-on-year. Venture capital investment in retailers tumbled 88% to $245 million. In the final quarter, only $2.4 million was invested in such companies.

The information technology sector saw the amount invested tumble 61% from $55 billion to $21 billion.

Sub-sectors that were particularly badly hit included: 

  • information services, down 79 % to $1.9 billion
  • communications and networking, down 64% at $8.4 billion
  • software, down 59% to $7.3 billion.

Healthcare investment held up better, down just 36% at $5.5 billion. Biopharmaceuticals fell 22% to $2.8 billion, while medical devices were down a mere 15% at $1.6 billion.