Once an obscure niche of U.S. finance, venture capital now plays a front-and-center role in the New Economy as the fertilizer for Internet
development. And its influence is growing fast. The tally for 1999 is in, and U.S. VCs invested more in young companies in the last quarter of 1999
than they did in all of 1998 — $15 billion, vs. $14 billion. The $35.6 billion full-year total was 2 1/2 times the 1998 amount, according to the
PricewaterhouseCoopers Moneytree survey, which tracks cash for equity investments in young companies. The figures were released on Monday.
It's all great news for entrepreneurs. Some 4,006 companies, 41% more than the previous year, tapped this largesse. And the deals are getting
bigger. The size of the average investment grew to $8.9 million from $5.2 million in 1998. All signs indicate that VC investment — particularly in
Internet companies — will continue to mushroom in 2000. Despite rising interest rates, economic conditions overall are still extremely propitious for
starting companies and investing in them. The tech-heavy Nasdaq index keeps hitting record highs. The U.S. economy continues to grow and become more
productive — a key factor in keeping wage and price pressures, and therefore interest rates, at bay. Consumer price inflation was only 2.7% for the
12-month period ended last December, and it mostly reflected higher energy prices, not wages. "From what I've seen of the first-quarter numbers so
far, the Internet investment has not slowed at all," says Tracy Lefteroff, a partner in the global-technology industry group at PWC. "The pace
continues to accelerate, and I wouldn't be surprised if the first quarter of 2000 is higher than the fourth quarter of 1999."
One thing's for sure: Low-tech companies need not apply for this pool of riches. Technology ate up $32.4 billion — all but a small fraction of
last year's total VC investment. That's three times the amount that went to tech in 1998. Internet companies alone — which cut across a number of
areas, including telecommunications and software — took nearly $20 billion, or 56%, of last year's VC cash. While Internet companies may not have
much in the way of tangible assets, they're clearly becoming increasingly expensive to launch — a sign of the intense competition in most niches and
the frantic speed with which they're pushed from concept to initial public offering. The average Internet investment almost doubled to $11.1 million
in 1999 from the year before.
Software companies swallowed $6.6 billion of investment in 1999. Telecommunications companies sucked up $5.2 billion of the total. Investment in
business-services companies topped out at $4.6 billion for the year. Retail and distribution companies got a $3.6 billion slice of the pie, and
new-media companies ended 1999 $2.9 billion richer in capital.
For all the talk of corporations, consulting firms, and other interlopers branching into the VC business, conventional firms with big names still
dominate the business. The bulk of the cash came from those that had invested in 40 or more companies. "Corporate investment grew, but not at the same
levels as the traditional VC firms," says PWC's Lefteroff.
And more than ever, getting VC money is a matter of being in the right place — mostly Silicon Valley. The region still has no serious challengers
to its position as the leading U.S. high-tech hotbed. Nearly 40% of the money invested last year — $14.3 billion — went into the Valley, $5.7
billion in the fourth quarter alone. New England got $4.1 billion for the year. New York City's much vaunted Silicon Alley pulled in $2.5 billion in
1999, making it the third-ranked area for VC dollars. The Southeast came in fourth, with $2.46 billion. Los Angeles/Orange County took in $2.36
billion of investment for the year.
What could spoil the party? A fall in the public markets, according to Lefteroff. That would kill investor enthusiasm for IPOs, the most efficient
way for investors to get out of those risky investments in unknown companies. But a market drop wouldn't entirely dry up the VC flow: Many of those
intrepid capitalists would rub their hands at the prospect of lower stock prices, which would force entrepreneurs to accept a lot less money for
shares of their companies. Right now, though, entrepreneurs are still holding a pretty strong hand.
By
Margaret Popper
in New York
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