Aug. 25–QUESTION: Where are entrepreneurs getting seed-round funding now that venture capitalists have altered their investment risk profiles?

ANSWER: Seed capital, also called early-round investments, from venture capitalists has always been rare.

Especially now, VCs are seeking the relative safety of later-round or more mature companies.

Venture-capital funding has dropped dramatically since 2000. Second-quarter 2000 venture investment totaled $28.7 billion. The second-quarter 2003 total was $4.3 billion, according to PricewaterhouseCoopers. For what it’s worth, VC investment went up about $300 million from the first quarter of 2003.

“Venture capital appears to be settling out at its natural level. Quarterly investing in the $4 billion range is sustainable and well in line with historical norms,” said Tracy Lefteroff at PricewaterhouseCoopers.

Still, most venture capital goes to existing companies or experienced executives with a track record. And the founder gives up a sizable percentage of ownership in exchange for the money. Only a few thousand companies get venture capital each year. For example, 3,000 companies received venture capital in 2002. The high point was 8,200 companies in 2000. In the second quarter of 2003, just 153 companies received venture capital for the first time.

Venture capitalists are looking for companies likely to return 40 percent on investment annually or higher and go public within five to seven years. During the Internet bubble, the expected rate of return was 100 percent annually. But the expectations have come back to earth. Private investors usually get into a company at an earlier stage, but are also looking for high-growth companies. They too have favorite industries.

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(c) 2003, The Orange County Register, Calif. Distributed by Knight Ridder/Tribune Business News.