Venture Capitalists Show Caution

First-quarter investments slip from a year earlier.
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Venture capitalists took a cautious start to 2005 by cutting back on investments in late-stage companies nearing entry into the public markets -- especially in the faltering biotechnology sector.

Venture capital investments totaled $4.6 billion in the quarter, down from the $5.4 billion in the previous quarter, according to the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. The first-quarter figure was also near the bottom of the $4.4 billion-$5.9 billion range at which venture investments have treaded water during the past couple of years.

The first quarter can be a weak one seasonally, coming off a quarter in which a lot of end-of-year investing occurs. But the biggest dropoff came amid biotechnology start-ups in a quarter in which the American Stock Exchange's Biotechnology Index fell 9.4% while the

S&P 500

fell 2.6%.

The quarter marked the first in two years when life-science venture investments dropped. Biotech investments fell to $1.08 billion from $1.6 billion the previous quarter, with the number of funded companies dropping to 129 from 162. Telecom and networking also saw below-average performance, while software investments held relatively firm.

Big drug companies had been turning to biotech as a way to replenish their pipelines with promising new drugs, but the poor performance of some IPOs and the withdrawal of high-profile drugs from the market last year curdled interest, said Jean George, a general partner at Advanced Technology Ventures.

Investments in later-stage start-ups slowed to $1.8 billion while first-time fundings saw a rise to $1.2 billion. Mark Heesen, a vice president of research at NVCA, said that he'd been expecting a rise in the number of early-stage fundings as VCs deploy the new cash they've raised, but it didn't materialize.

All in all, the steady pace of venture flows provided a rather boring reminder of what many VCs consider a welcome phenomenon: After years of volatility and turmoil, the staid world of venture capital has returned to normal.

"I think there is very little new news here, which after the roller coaster ride from 1999 to 2003, that's a good thing," said Tom Crotty, a venture capitalist at Battery Ventures.