Q1 Fund-Raising and Investments Hit Lows –

Perhaps it was due to concerns over the impending war or maybe it was a result of the plodding U.S. economy. Whatever the reason, the first quarter was a low point on two counts for U.S.-based venture capital firms. Fund-raising hit its lowest quarterly total in nine years, while the amount invested by U.S.-based VCs hit its lowest point in six years.

On the fund-raising front, $996 million in net capital was raised by 23 U.S.-based venture firms (excluding fund-of-funds) between January and March, according to a survey by Thomson Venture Economics and the National Venture Capital Association (see chart below). That’s a 41% drop from the fourth quarter of 2002 and the first time since the third quarter of 1994 that venture capital firms have raised less than $1 billion.

The only bright spot was “net” fund-raising, a relatively new data point used to account for reductions in fund size. The net total for the first quarter was $603 million, up 28% from the $430 million in net funding the previous quarter and a big improvement over the negative net total in the second quarter of last year. It is important to note that the first-quarter net fund-raising data does not include a publicized fund cut from Accel Partners, which goes into effect at the end of the second quarter.

Silver Lining

As always, there were some happy faces that peaked through the gloom. The big winner was Intersouth Partners, which held a first and final close of $205 million on its sixth fund. The fund plans to follow its traditional investment strategy of investing in early-stage life sciences companies in the Mid-Atlantic and Southeastern regions of the United States.

Other strong fund-raisers during the quarter included Quaker Bioventures Fund I with $180 million, Lumina Ventures with $156.1 million ($190 million to date), Caduceus Private Investments II with $100 million, and ARCH Venture Partners with a $75 million first close on a $350 million-targeted sixth fund.

The news was just as gloomy for first-quarter disbursements: Venture capitalists put $3.8 billion to work between January and March, 40% less than they invested in the same quarter one year earlier, according to the PwC/VE/NVCA Money Tree Survey (see chart, page 14).

“It doesn’t surprise me,” says Andy Goldfarb, executive managing director of the Boston office of Globespan Capital Management. “People have realized that extending the runway is more important than being first to the party, since the timing of the party is still in question.”

Goldfarb says that he expects investments to stabilize in the future but an actual increase is unlikely, given falling valuations and failing venture firms.

The total amount of venture dollars raised during Q1 2003 was the lowest since $3.11 billion was raised in the first quarter of 1997. The first quarter also was off 10% from the $4.26 billion raised between October and December of 2002, and came in 40% lower than the $6.48 billion secured during the first quarter one year ago.

The total number of Q1 deals-623-was the lowest number since the third quarter of 1996.

As always, there were some bright spots amid the gloom. The most notable example was integrated circuit maker Matrix Semiconductor Inc. The Santa Clara, Calif.-based company actually closed two rounds of financing in the first quarter, the first of which was a $15 million strategic play from Nintendo. The second investment was a $52 million fourth round (which did not include Nintendo’s $15 million) from Benchmark Capital, Integral Capital Partners, Seagate Technology, Skymoon Ventures, TeleSoft Partners and Western Technology Investment.

Only two other domestic companies managed to beat the half-century mark. The first was SCP Global Technologies, which secured $50 million in first-round funding in a deal co-led by 3i Group and VantagePoint Venture Partners. The Boise, Idaho-based company develops wet-processing equipment for semiconductor wafers.

Calix Networks Inc. also raised $50 million. The Petaluma, Calif.-based company makes optical network transmission equipment for telecom carriers. Investors included Azure Capital Partners, Integral Capital Partners, Kinetic Ventures, Meritech Capital Partners, Redpoint Ventures and TeleSoft Partners.

United Platform Technologies Inc., a telecom equipment integrator that raised $58 million of Series A financing, is not included in the PwC/VE/NVCA totals because it is headquartered in Beijing and domiciled in the Cayman Islands.

Biotech Still Hot

Four of the remaining top seven deals of the first quarter came from the life sciences sector, which accounted for 21.4% of the quarter’s overall venture pie. This is a slight decline from the 24.9% tallied in the previous quarter.

Overall, 105 life sciences companies raised $821 million during the first quarter. Not surprisingly, information technology companies led the pack with 455 deals raising $2.79 billion, which represents 73% of the total.

The new numbers show no significant change in the stage of the average deal, with the vast majority of capital being pumped into expansion-stage rounds. The percentages for later-stage deals edged up slightly from the fourth quarter, while early-stage deals lost a fraction of luster to startup/seed-stage rounds.

New Enterprise Associates was the most active investor during the quarter, participating in 17 different deals. The bi-coastal firm pumped a total of about $50 million into companies such as Fox Hollow Technologies Inc., Peptimmune Inc., WholeSecurity Inc. and Determine Software Inc.

Other big first-quarter spenders were Austin Ventures, Intel Capital and Venrock Associates, each of which participated in 13 deals.