What gives? Late last year, in tandem with the 33% rebound in the Nasdaq since its post-September 11 low, U.S. venture capitalists loosened the purse strings for the first time in four quarters. Experts say firms have written off much of the deadwood from the Internet frenzy and are under pressure from their investors to spend the $51 billion that has been lying fallow for the last two years. "People have wallets so thick that they're leaning to one side," says Gilbert H. Kliman, a partner at Inter West Partners in Menlo Park, Calif.
It's not that venture capitalists are putting more total dollars to work. It's that they are putting more money into the most promising deals, many of them in the health-care sector. That is pushing up valuations -- the worth of an entire company based on the price the VCs pay for the shares they get.
ESCALATING VALUATIONS. According to researcher Venture Economics, the median valuation for private biotech outfits grew 55%, to $52.5 million, in the final quarter of 2001 from the previous quarter and 41% from a year earlier. In the fourth quarter, the median valuation in life sciences rose from $22.3 million the quarter before to $50 million, while for IT companies, it grew by a more modest 15%, to $32 million. "The life signs are there," says Venture Economics Vice-President Jesse E. Reyes.
The data are encouraging. But experts caution that such figures should be viewed as no more than signs that venture funding may have finally bottomed. "It's not the beginning of a bubble," says Tracy T. Lefteroff, managing partner for private equity at PricewaterhouseCoopers. "Rather, it might be the beginning of an up cycle. Things had gotten so gloom-and-doom that there was nowhere to go but up." As venture firms gutted out an unprecedented four straight
money-losing quarters, they scaled back investment from a high of $91.6 billion in 2000 to $32.1 billion last year, says San Francisco's VentureOne Corp.
Biotech and life-sciences startups are leading the uptick, in part because of breakthroughs in genetics research. Health care's share of the venture pie swelled from 9% in 2000 to 17%, or $5.6 billion, in 2001, according to VentureOne. Companies such as Renovis, for example, use cutting-edge genomic technologies developed at top universities. And its founders include well-known scientists such as Chiron Corp. co-founder Edward E. Penhoet. "Our success reflects in large part on the ability and reputation of our people, our technology, and our goals," says Goodman.
EYES ON WALL STREET. Some Internet-technology startups that fill that bill are getting funding. On Jan. 28, Neoteris Inc., a Sunnyvale (Calif.) neophyte, said it had raised $15 million -- more than tripling the company's value, which it won't disclose -- in less than a year. Its technology allows secure remote access to corporate networks through Web browsers, a need that became more pronounced following September 11. What's more, says CEO Krishna Kolluri, Neoteris will be profitable in a year.
Provided that the stock market doesn't tank, venture investors expect to pay more for young companies in 2002. "We're poised to see it," says Chris Ehrlich, a senior associate at InterWest. But entrepreneurs shouldn't bank on it. By Linda Himelstein in San Mateo, Calif.