Venture capitalists put a record $12.6 billion to work in the first half of this year, completing more deals with bigger price tags than ever before.
About half of the money, almost $6.1 billion, went into Internet companies, mostly content, e-commerce and services enterprises, according to Venture Economics Information Services (VEIS), a sister company to Venture Capital Journal.
“E-commerce is a huge thing, and I think we’re just at the beginning,” says Brentwood Venture Capital Partner John Walecka.
The first quarter saw $5.07 billion poured into 805 companies, and the second quarter saw $7.56 billion parceled out to 958 companies – the latter quarter producing record-breaking figures on both counts.
In keeping with the theme of “more,” deal sizes also grew in the first half of 1999. The average venture investment in a company has grown in recent years to $7.87 million from an average of $4.48 million in 1993. The average capital invested per round also increased to $7.13 million in the first half of 1999 from $3.23 million in 1993, having hit $4.84 million in 1998, according to VEIS.
To Walecka, the growing deal sizes simply reflect the reality of the current environment and the fevered pace required to get a portfolio company’s product or service to market quickly. “You move slowly in this market, [and you’ve] missed it,” he says, recalling deals ranging from $2 million to $3 million a decade ago. Today, however, Walecka sees $7 million to $10 million deals. Although he has witnessed firms writing $60 million checks, Brentwood will not invest more than about $15 million in a single company from its current fund, a $300 million vehicle that will be fully invested within a few months.
Late-stage information-technology firm Technology Crossover Ventures has been adding to its investment staff to keep up with market opportunities, says Partner Rick Kimball (story page 35). The group selectively makes earlier stage investments, particularly in the Internet, telecommunications and professional services sectors, but most of TCV’s efforts are concentrated on expansion-stage companies.
TCV is not alone. Many first half deals involved expansion-stage companies; indeed, this stage of investing has been grabbing an ever-increasing piece of the VC pie since the mid-1990s. In the first half of this year, 61% of capital disbursed went into expansion-stage enterprises, an increase from 55% in 1998. The percentage has been growing since 1994’s 30%, but expansion is not just the “winner” in terms of dollars. Forty-seven percent of the rounds of financing that took place in the first six months of 1999 involved such businesses.
In both dollars and numbers of rounds of financing, early-stage investing took second place. Twenty-six percent of the money disbursed in the first half of this year went into early-stage companies, a slight decrease from 1998’s 28%. Thirty-nine percent of financing rounds from January to June 1999 involved early-stage companies, a 1% increase from 1998, according to VEIS.
Same Old Thing
As far as the venture industry’s choice of investment sectors, there were no surprises. Computer software and services companies gobbled up $5.2 billion, and communications enterprises attracted $2.6 billion in the first half of this year. Consumer-related companies took in $1.5 billion, and “other products” received $1.3 billion. (For these figures, Internet companies do not have their own industry category and are scattered throughout other industries.)
At press time, Doll Capital Management’s second fund, which has a $135 million cap, was on the cusp of a second close at about $120 million. Managing General Partner Dixon Doll says Doll Technology Investment Fund II (VCJ, July, page 24) already had invested in six deals, all but one having a fundamental e-commerce aspect. However, his firm still plans to back non-e-commerce communications companies such as those working on wireless broadband, integrated chip sets for local-area network access and home local-area-network projects.
Despite the recent disbursements frenzy, Doll expects the excitement eventually to cool down a bit. In light of an early August market correction for Internet stocks and the poor performance of Internet IPOs such as 1-800 FLOWERS.com, he expects tempered enthusiasm for new issues of “non-differentiated dot-com” companies. And as a result, he predicts VCs will invest more conservatively and raise their standards relative to business models and management teams.
“You won’t see the average size of the deal go down very much at all, but I think you will see slightly reduced disbursements,” Doll forecasts. He notes that VCs have been investing at the incredible speed of “Mach Five” for so long that a cooling off period does not seem unreasonable. That said, he admits he could be wrong.
As for his own new fund, Doll expects its deals to be 75% to 100% larger than deals from its first fund, a $46.3 million vehicle that wrapped in fall of 1997. He also expects half the companies in the new vehicle to have some kind of e-commerce angle, a jump from 25% to 30% of the companies in the first fund’s portfolio.
Wish They All Could Be California
In addition to enthusiasm for e-commerce, VCs are excited about the Golden State.
As usual, California’s companies consumed more capital in the first half of this year than any other state, attracting $5.26 billion. That’s 42% of the dollars doled out in the first half, up slightly from 1998’s 40%. Massachusetts took the second biggest chunk of cash in the first half – 12% – maintaining its traditional second-place ranking with $1.47 billion.
Despite professed enthusiasm by some VCs – not to mention regional public relations efforts – other areas are not attracting much venture money, despite catchy monikers such as “Silicon Alley,” “Silicon Prairie,” “Silicon Forest,” Silicon Desert” and even “Silicon Barrio.”
Indeed, in New York, which captured the third highest amount of money in this first half, 82 companies took in $881 million – less than 7% of the capital dispersed.
Washington raked in $548 million, just over 4%, followed by Texas, with $445 million, or 3.5%, according to VEIS.
TCV Partner Jay Hoag views venture disbursements as a set of inter-related conditions. VCs have a lot of money and hence, want to invest larger chunks into promising companies. At the same time, entrepreneurial enterprises, especially those in the e-commerce space must rush to get their product out the door before competitors beat them at gaining financing. “Part of the reason for that is the money is there,” Hoag observes.
VCs raised a fresh $10.4 billion in the first half of 1999 and raked in $24 billion in 1998, (story page 43), providing themselves with plenty of money to deploy.
States Garnering the Most Venture Capital in H1 1999
1998 H1 1999 Number of Total $Mil. Average $Mil
Ranking Ranking State Companies Invested per Company
1 1 California 636 5257.45 8.27
2 2 Massachusetts 191 1472.60 7.71
3 3 New York 82 881.24 10.75
8 4 Washington 67 547.74 8.18
4 5 Texas 89 444.88 5.00
5 6 Colorado 41 442.49 10.79
29 7 District Of Columbia 8 341.72 42.72
10 8 New Jersey 34 330.87 9.73
12 9 Connecticut 30 281.93 9.40
16 10 North Carolina 41 262.40 6.40
Source: Venture Economics Information Services and the National Venture Capital Association
First Half 1999 Investments by Industry
Number Number of Total $Mil. Average
Industry of Rounds Companies Invested per Company
Computer Software and Services 746 673 5204.93 7.73
Communications 241 215 2625.36 12.21
Consumer Related 166 154 1459.35 9.48
Other Products 197 172 1344.36 7.82
Medical/Health 214 193 986.32 5.11
Semiconductors/Other Electronics 72 68 584.52 8.60
Biotechnology 96 88 556.61 6.33
Computer Hardware 49 41 309.59 7.55
Industrial/Energy 20 19 26.26 1.38
Unknown 5 5 8.45 1.69
Source: Venture Economics Information Services and the National Venture Capital Association.
First Half 1999 Internet Investments
Total Total Total $Mil. Average $Mil.
Category Rounds Companies Invested* per Company
Content/E-commerce/Services 301 270 2644.4 9.8
Softare and Tools 155 146 1108.1 7.6
Internet Services 100 92 1017.3 11.1
Other Internet Related 46 44 577.3 13.1
Infrastructure 37 33 525.0 15.9
Hardware 23 20 192.8 9.6
*Totals do not include data from deals of undisclosed size.
Source: Venture Economics Information Services and the National Venture Capital Association.
First Half 1999 Investments by Stage
Number Number of Total $Mil. Average $Mil.
Stage of Rounds Companies Investment per Company
Expansion 824 763 7668.6 10.05
Early Stage 689 659 3243.52 4.92
Later Stage 220 203 1367.57 6.74
Buyout/Acqusition 26 26 284.14 10.93
Unknown 10 10 50.97 5.10
Other 3 3 15.34 5.11
Source: Venture Economics Information Services and the National Venture Capital Association.
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