Venture investments bounced back in 2004

Venture capitalists invested more money in privately held technology companies during 2004 than in 2003, according to a report released Monday, marking the first year-over-year rise in investments since 2000.

In 2004 venture capitalists put US$20.4 billion into 2,876 deals, up from US$18.9 billion invested in 2,847deals during 2003, according to the latest release of the MoneyTree Survey by PricewaterhouseCoopers International (PwC), Thomson Venture Economics and the National Venture Capital Association (NVCA).

The survey also reported results for 2004's fourth quarter, which saw US$5.3 billion in 747 investments. That's up from US$4.6 billion in investments during 2004's third quarter, yet slightly lower than the US$5.4 billion invested during 2003's fourth quarter.

The surveying organisations attributed the rise in venture capital during 2004 to more investments in both early stage and late-stage companies. "Activity is picking up and increasing at the two ends of the spectrum," says John Taylor, vice president of research with NVCA. "The early companies that are just getting going will become the IPO candidates in 2009, 2010 and 2011. A lot is also happening in the later-stage companies and that's really where the growth story is for this year."

One event in particular bolstered late-stage investments during the second half of the year, as investors poured more money into companies looking to go public or become acquired, says Adam Reinebach, vice president of Thomson Venture Economics. "There's no question the Google IPO had a positive impact on the market heading into the fourth quarter," he says. "It was not a deal or trend that was felt across just one or two sectors, it was really something that opened up the IPO market as a whole. You saw companies in all sectors being able to go public if they had a good story to tell."

Another survey, the Quarterly Venture Capital Report by Ernst & Young and VentureOne, pegged 2004 investments slightly lower at US$20.4 billion. This report put fourth-quarter investments at US$4.5 billion, down 15 percent from the deals made during the fourth quarter of 2003, according to officials.

NVCA's Taylor said discrepancies in reports may be the result of different definitions of sectors and counting money committed vs. checks written.

VoIP service provider Vonage Holdings was the star of 2004, garnering the most venture capital, in two separate chunks, totaling US$145 million. "But that doesn't mean there's been a comeback for this industry," warns Tracy Lefteroff, global managing partner of PwC's venture capital and private equity practice. Investors put US$1.9 billion into telecommunications companies in 2004, down from a high of US$17.6 billion in 2000.

Investments in networking companies are also languishing; 2004 saw US$1.6 billion worth of investments in those vendors, compared to the US$11.5 billion that was invested in 2000 during the highpoint of the Internet bubble.

The software sector remains strong, garnering US$5 billion in investments during 2004. "I think it would be misleading to conclude that the whole IT sector is strong," Lefteroff says. "I think it's really to a large extent being driven specifically by software."

One venture capitalist says his company is decreasing its investments in the telecommunications sector, and enterprise technology in general, and focusing more on companies with consumer-oriented offerings. "We believe that a lot of the focus for the next ten years will be in the consumer space as opposed to enterprise space," says Bill Stensrud, a venture capitalist with Enterprise Partners.

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