Apr. 29–Venture capital investment in San Diego County has hit its worst slump in six years, with only $121 million making its way to privately held startup companies in the first quarter.
A study being released today says the grim climate for new financing was evident in the national statistics as well, as investment in early-stage U.S. companies fell to $3.8 billion.
That was the lowest level since the third quarter of 1997, according to the survey by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association.
Venture capital experts attributed the slide to an ailing economy, war fears and the lack of appetite on Wall Street for initial public offerings a traditional way for venture capitalists to cash out on their investments.
“The reality is that venture capital will not lead the economy out of this slump,” said Jim Ingraham, a partner with PricewaterhouseCoopers’ San Diego office. “It will follow out.”
In San Diego County, venture capital investment dropped 28 percent from the prior quarter’s total of $168 million, and 64 percent from the $334 million raised in the first quarter of 2002, according to the PricewaterhouseCoopers survey.
Not since the first quarter of 1997, when local companies raised $74.8 million in venture backing, has investment been so low.
But some venture capitalists caution that the current quarter appears unduly bleak because of comparisons to the venture capital investment frenzy of 2000 and 2001.
“The Internet and the genomics revolution both transpired around the same time and got investors hyperbolically excited,” said Steve Tomlin, a partner in Avalon Ventures, a San Diego venture fund. “But when the returns on those technologies weren’t immediate, overexuberance turned to depression and then this trough of despair.
“Ultimately, we’ve come out to some level of reality,” said Tomlin.
Yet that reality is cold comfort to the cash-hungry companies now vying for venture capital backing.
Only 21 San Diego companies received investments in the first quarter of 2003, including $26 million raised by Entropic Communications and $25 million raised by Acadia Pharmaceuticals, according to the PricewaterhouseCoopers survey.
That compares with 27 deals made the previous quarter and 29 deals in the first quarter of 2002.
San Diego’s ranking among national markets as a venture-capital magnet also deteriorated from 8th position in the fourth quarter to 10th position during the first quarter of 2003.
Locally, the biotechnology and medical device industry lost significant ground, raising $53 million, or 43 percent of the total investments made in local start-ups in the first quarter.
That compares with $78 million or 47 percent in the previous quarter, and $173 million or 52 percent of the funding raised in the first quarter of 2002.
Another crucial high-tech industry in San Diego, telecommunications and networking equipment, brought in $28 million, or 23 percent, of the total funds invested during the quarter. That compares with $42 million, or 25 percent, invested in the prior quarter and $106 million, or 32 percent, funded in the first quarter of 2002.
About $11 million, or 9 percent, of the total investment in the quarter went to software and computer companies.
Nationally, investment in the first quarter was down 12 percent from the previous quarter and off 41 percent, or $2.6 billion, from the first quarter of 2002.
A total of 623 companies received funding in the first three months of this year, a decrease of 103 deals, or 14 percent, from the previous quarter and 193 deals, or 24 percent, for the first quarter of 2002.
A similar survey released yesterday by Ernst & Young and VentureOne also found venture investment in decline nationally. According to that survey, first-quarter investment dropped to $3.4 billion, down 21 percent from the previous quarter and 40 percent from the first quarter of 2002.
Deal activity in January was almost “nonexistent,” the Ernst & Young survey noted, but the pace picked up in February and March. As with the previous quarter, most of the money about 72 percent went to late-stage, established companies as their venture capital backers tried to keep them afloat.
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