VC Pace Unabated In Third Quarter –

NEW YORK – In a mild surprise to some observers, venture capital firms put equity to work at a record pace in the third quarter of 1998, according to the PricewaterhouseCoopers MoneyTree Survey released in November. The $3.77 billion investment total surpassed the previous record of $3.73 billion set in the second quarter.

“The pure momentum of making deals carried the VCs through [the third quarter],” said Kirk Walden, national venture capital group director at PricewaterhouseCoopers.

There was concern that valuations might have stalled deals that were in the pipeline, but Mr. Walden said the competition for good deals mitigated the effects of the public market downturn. The increased activity in the third quarter stood out further when compared with the $2.92 billion invested in the third quarter of 1997. In fact, venture investments through the third quarter of 1998 totalled $10.5 billion, just $1 billion less than the $11.5 billion raised in all of 1997.

“We are predicting that we will hit $14 billion for the entire year, and that calls for a $3.5 billion fourth quarter,” Mr. Walden said, noting that the firm provides services to 65 venture firms and was seeing no sign of a fourth quarter slowdown.

Silicon Valley continued to lead all regions in attracting venture capital, with 207 companies garnering $1.24 billion in the quarter. New England again followed in second place, although Mr. Walden noted that the region’s performance – $550 million invested in 114 companies – was not as strong a second as usual. The Southeast, Los Angeles/ Orange County region and Texas rounded out the top five regions. Companies in each of those areas garnered more than $250 million in the quarter.

Software and information-related companies, defined by the survey as everything from communications to enterprise software, were a major driver in the pace of investment, as the sector drew $1.46 billion in the quarter, practically doubling the previous year’s performance and outpacing any other sector by more than $500 million. Like New England regionally, telecommunications came in a weaker- than-usual second, gathering $930 million. The $850 million difference between the third quarters of 1998 and 1997 can be almost entirely attributed to these two sectors. “The fact of the matter is everything else remained flat,” Mr. Walden said.

While Mr. Walden said venture investments have increased in size, he noted that VCs continue to invest in companies at every stage of development. The survey classified companies in four groups: start-ups, early, expansion and late-stage. Venture firms funded 297 start-up companies in the third quarter of 1998 versus 299 of those companies in the third quarter of 1997.

“The number of start-up companies that are getting funded represents the pipeline, and those numbers are holding up pretty well, which is a good sign,” Mr. Walden said.