Venture Capital Investments Decline in 2002

Venture-backed companies received $19.4 billion in 2056 financing rounds, representing a decline of 66% and 79% from the venture capital peak in 2000. The fourth quarter of 2002 remained relatively flat compared to the previous quarter.   During this period, investments increased to $4 billion invested in 424 transactions, from $3.9 billion in the third quarter (See  VC Investments Plunge 23.5% in Third Quarter) , according to Ernst & Young and VentureOne’s joint US venture capital survey.

Additionally, median deal size dipped slightly in 2002 to $6.5 million from $7 million seen in 2001.   The report attributed the decline to the number of extremely large deals continuing to fall off, pointing to only one large deal in the fourth quarter, a $156 million financing round raised by Greenwood Village, Colorado-based WildBlue Communications.

The reported also noted a decline in the number of venture dollars committed to existing companies.   2002 saw only 30% of all venture investments going to existing companies, down from 37% of the deals in 2001.

“Healthy” Start-Ups

However, there was silver lining to be found in the cloud, especially in health care investing, which constituted 27% of 2002 investment, up from 17% in 2001. Although the money invested in health care companies declined from $6 billion in 2001 to $5.2 billion in 2002, the 14% drop is low compared to the 48% and 60% declines seen in IT and products and services, respectively.

Health care’s good fortune continued in the fourth quarter, with investment rising 4%, to $1 billion. The report attributes health care’s increase in the fourth quarter to gains in medical information systems and devices offsetting a fall off in allocations to biopharmaceuticals.

Also, restarts, financing rounds characterized by significantly reduced valuations that effectively “wash out” existing investors who do not participate in the new round, added prominence in 2002. In years past, they comprised 1% or less of all deal flow, but in 2002 that figure rose to 3%. And in the fourth quarter, fully 5% of all venture capital transactions were restart rounds.