Venture Capital Still Loves the Net

(page 2 of 2)

Many VCs are looking to Web-oriented companies, which typically require smaller investments to operate than firms in other sectors, as safer bets in a weak economy. Battery Ventures made three first-quarter investments of less than $1 million in tech startups, including a data-analysis software maker named Lattice Engines and an undisclosed social media advertising company. "It gives you more shots on goal," says general partner Roger Lee. The small investments can let Battery own 30% or more of a company for a small amount. Even if a company is eventually sold for less than $100 million, "that kind of outcome is reasonable for the fund," he says. "We don't need to generate a $1 billion exit for it to be a good return for us."

Home-run IPOs and buyouts were hard to come by in the first three months of 2008. IPOs of U.S. venture-backed companies raised a median of $53.4 million, the lowest since the second quarter of 2006. And just 80 such startups were acquired, the lowest count since the beginning of 2003. Buyers paid less for them, too: a median of $63 million in the first quarter, vs. $90 million a year earlier, according to VentureSource.

It's also uncertain whether the big tech acquirers of 2007—Google (GOOG), Microsoft (MSFT), and Yahoo (YHOO)—will spend 2008 digesting those acquisitions or making more. "You could argue it both ways," says Battery's Lee.

Overall, the technology sector drew $3.88 billion in VC funding across 373 deals, up 20% from the $3.24 billion invested in the first quarter of 2007, VentureSource says. Among the largest venture deals was Slide, a maker of software widgets for social networks that raised $50 million in January (BusinessWeek.com, 1/18/08). And social networking site Facebook raised $40 million in March.

Those two deals will likely yield big returns for their investors. What's less certain are the returns from the hundreds of tech startups VCs are staking each quarter despite the murky outlook for big cash-outs.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.