Jul. 29–Venture capital investment nationwide rose in the second quarter for the first time in more than three years perhaps signaling that the long drought in funding for startup companies isending.
San Diego companies also showed gains in venture capital investment in the second quarter, but the increase was small and experts cautioned against making too much of one quarter’s results.
Total venture capital flowing nationwide reached $4.3 billion for the quarter, up from $4 billion in the first quarter, according to a joint survey released yesterday by PriceWaterhouseCoopers, the National Venture Capital Association and Thomson Venture Economics.
A separate survey by Ernst & Young and VentureOne found similar results, with second-quarter venture investments estimated at $4 billion, up 14 percent from the first quarter.
While that’s not a strong turnaround $28.4 billion in venture capital flowed in the second quarter of 2000, the height of the tech boom it is one of the few positive signs for an industry that had seen three years of steadily declining activity.
“We probably need a few more quarters to reach any conclusions, but I think what we’ve done here is turn the corner” from pessimism to optimism, said Todd Dagres, general partner with Battery Ventures of Wellesley, Mass.
In all, 669 firms received venture capital funding during the quarter.
Investments in risky young companies increased, which experts viewed as a positive sign. Many venture capitalists have shunned such upstarts in the wake of huge losses from failed investments in Internet companies.
While venture capital funding improved from the first quarter to the second quarter, it still lagged the second quarter of 2002, when 826 companies received $5.98 million.
In San Diego, local companies pulled in $156 million in venture funding during the second quarter, up just $3 million from the first quarter and below the $366 million invested in the second quarter of 2002.
Locally, 23 companies received funding, the same number as in the first quarter but down from 35 last year.
Jim Ingraham, a partner with PriceWaterhouseCoopers’ technology practice in San Diego, said it’s hard to draw any conclusions from the flat performance in San Diego. “But nationwide, there is something meaningful,” he said. “The national results are telling us something positive about the state of the economy and the mindset of venture investors.”
The biotech and medical device industries led the way locally, amounting to 61 percent of total deals funded, the survey found. Software and computer companies netted $33 million, or 21 percent of local venture funding.
The struggling telecommunications sector got $16 million for the quarter.
“This sector is so important to the overall health of San Diego’s high-tech economy,” said Ingraham. “Unfortunately, most experts predict it will be the slowest to recover.”
Local companies receiving the most funding during the quarter include specialty drug maker Santarus Inc., $39.9 million; and medical technology firm CryoCor Inc., $15.3 million.
Venture capital investors locally put their money mostly into mature companies. More than 70 percent of investment dollars went to late stage firms, many of which have already received several rounds of venture capital funding.
“They are the companies that actually have revenue streams in place,” said Don Williams, regional venture capital advisory group leader at Ernst & Young. “They’re not simply in the design phase. They have product in the marketplace.”
Williams thinks it will take a more mature company that is well on its way to profitability to have any chance of success in today’s market for initial public offerings.
Venture capitals are speculating that a window in the IPO market may crack open this fall particularly for biotech and medical device firms.
“On the IPO front, the indices have been up, and biotech has led that process to a large degree,” said Stan Fleming of Forward Ventures, a San Diego venture capital firm that invests in life science companies. “People are frantically laying the ground work” for public offerings.
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