2003 first quarter data on venture funding suggests that investors were hibernating for the winter-or at least their money was. A slow economy, world events, and the Iraqi conflict contributed to arough quarter for emerging growth companies seeking funds. But as the summer heats up, so could the potential for more deal flow. And despite declines in venture investments, fund seekers may havecause for optimism.<\/p>\n
The Big Picture<\/p>\n
According to the Ernst & Young \/ VentureOne Venture Capital Survey, first quarter 2003 venture investment dropped below $4 billion for the first time in five years. Just $3.4 billion was invested in 404 deals in the first quarter of 2003, representing declines of 21 percent and 12 percent, respectively, from the previous quarter. The moderate drop in deal flow combined with the substantial decline in dollars pushed the overall median round size to $6 million, down from $6.6 million in the fourth quarter of 2002.<\/p>\n
These numbers reflect continued risk aversion on the part of venture capitalists and a more disciplined company-building mode, both reminiscent of the mid-nineties. The statistics tell a similar story: deal flow is on par with 1996 and dollars invested are in the 1997 range.<\/p>\n
While most sectors lost ground, a couple of information technology segments had a good quarter. The information services segment, which was depressed throughout 2002, saw a 70 percent jump in the first quarter to $188 million. Investment in semiconductors was bolstered by the quarter’s largest deal, a $52 million financing round completed by Matrix Semiconductor, a developer of 3D manufacturing technology that enables the production of ultra- dense, low-cost chips. Matrix’s deal helped the segment improve upon the previous quarter’s total by 38 percent.<\/p>\n
The number of software-related transactions declined 6 percent to 130, and investment in the sector fell 17 percent to $798 million. Nevertheless, software continues to buck the overall downward trend in subtle ways. According to the Ernst & Young\/VentureOne survey, a greater percentage of software companies received first-time funding in the first quarter of 2003 than in any quarter during 2002. Last year, early-stage software deals did not exceed 28 percent of overall software deal flow. But one-third of the first-quarter software deals were seed and first rounds.<\/p>\n
A Glimmer of Hope<\/p>\n
Don Williams, Ernst & Young’s Pacific Southwest Venture Capital Advisory Group Leader, believes ongoing issues are playing a role in venture capital activity. Williams explained that a lack of liquidity opportunities for existing investments from both IPOs and mergers are contributing factors. He also noted that many funds are continuing to wrestle with underperforming investments from prior years. Despite current challenges, Williams believes there’s a positive trend in venture capital funding. “Venture capitalists, in general, remain enthusiastic because even though deals are smaller in number, the opportunities being funded are very promising,” said Williams.<\/p>\n
The Local Story<\/p>\n
In Orange County, 10 deals were completed during first quarter 2003 representing $66 million. That’s $50 million less than the first quarter of 2002, but it does represent an 8 percent increase from the fourth quarter of last year. The information technology sector (which includes communications, electronics, information services, semiconductors and software) was the strongest sector in Orange County, bringing in nearly $40 million. In fact, 50 percent of the deals completed and 61 percent of the dollars raised were in this sector. This was the third straight quarter that information technology led the Orange County market; healthcare trailed with $23 million in investment funding.<\/p>\n
Within the information technology segment, the $40 million was split between semiconductor and software companies, with $26 million going to the semiconductor market and $14 million to software. Only five deals closed within this sector, but that’s on par with the first quarter of 2002. The largest of the investment rounds was $20 million, which went to semiconductor company and Western Digital spin-off, Aristos Logic.<\/p>\n
Orange County is fairly even with its neighbors to the north and the south when it comes to technology investments. In the first quarter, Los Angeles closed seven deals worth $53 million and San Diego closed six deals worth $41 million. Overall, San Diego’s biotech infrastructure allows it to remain in the venture capital lead. In the first quarter of 2003, the San Diego area closed 12 deals worth $116 million-over half of which went to healthcare- related organizations.<\/p>\n
The Right Direction<\/p>\n
In Southern California and around the nation, the investment market is not what it used to be-and that might be a good thing. A stabilizing economic environment, a progressing global scenario, and an increasing number of viable business plans and solid management teams might be the right ingredients to stir investors and jump start venture capital activity.<\/p>\n
(C)2003 Ernst & Young LLP<\/p>\n
Doug McCombs leads Ernst & Young’s Technology practice in Orange County. He can be reached at (949) 437-0360. Ernst & Young paid for this space and is solely responsible for its content.<\/p>\n
Copyright CBJ, L. P. Jun 16-Jun 22, 2003<\/p>\n","protected":false},"excerpt":{"rendered":"
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