Tech Outlook: Venture Capital Slips a Bit but Is Far From Drying Up

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Venture capital

If tech stocks fall off in the second half, don't blame venture capital.

The three main trackers of such money report that while spending slowed in the most-recent quarter, money is still lush for start-up companies. And the trackers believe investment won't dry up anytime soon.

Venture One reported a 6% downtick from the first quarter to $17.2 billion. Venture Economics saw a less-than-1% reduction in spending, to $24.8 billion. PricewaterhouseCoopers doesn't release its numbers until Aug. 14, but expects that the quarter's numbers will come in flat or creep up ever so slightly.

Bottom line: Stock market volatility hasn't clogged the financing jet too much yet.

"We think a new plateau is being established," says Kirk Walden, national director of venture capital research at PricewaterhouseCoopers. "What does that end up being down the road three years? Is it $30 billion, $35 billion or $25 billion? I don't know the answer, but it's substantially greater than the $14 billion in funding we saw in all of 1998. We see this as a new level for venture capital, and its relative importance in the investing world."

E-commerce companies took a hit during the quarter, according to Venture One and Venture Economics. Both saw the supply of venture capital roasted peanuts dry up, while the Internet hogged up first class, with 86% of Venture One's and 81% of Venture Economics' reported funding dollars.

Ah, the Lightning Storm

Deal flow did not recede dramatically, despite a lightning storm in the public markets that caused many start-ups to return to their backers' safe havens for more hefty rounds of funding.

Venture One pegged a 3% decrease in deals, with 1,054 companies funded overall. Venture Economics saw a slimmer dip, only 68 shy of the first quarter's 1,695. Pricewaterhouse's Walden found no drastic drop-off in deals during the quarter, which he considers another sign of growing strength of venture capital houses.

"Now that we have all these funds with $1 billion to invest, the logical thing for a company that is just poised to go IPO but sees that this isn't the right environment is to go back to the well for funding," he says. This wouldn't have been possible a few years ago, he observes, when funds were much smaller. "If a VC firm only had $50 million, it wouldn't be an option. Sorry bud, we're done. Shut 'em down."