Where did all the money go?
For two quarters now, venture capital investments have slowed in Orange County and elsewhere. Venture financiers, usually big risk takers, have mellowed as the stock market slumps and many startups teeter on the brink of bankruptcy.
In the fourth quarter, venture financing of Orange County companies dropped 11% to $184 million from the third quarter, according to the PricewaterhouseCoopers LLC Money Tree Survey done in partnership with Reuters Group PLC’s VentureOne.
The fourth quarter drop in venture capital funding was even sharper compared with the second quarter, when OC funding hit a record $264 million. Funding in the most recent quarter was lower by 30% vs. the second quarter.
“Clearly the investments have peaked earlier in the year and there is a pullback,” said Richard Withey, the partner in charge of the Southern California Technology & Entertainment Practice at Pricewater-houseCoopers.
While local venture funding fell from its 2000 peak, the fourth quarter is up 21% from the year-ago period. Back in the fourth quarter of 1999, OC companies landed $152 million in venture funding.
And the survey doesn’t capture all the funding that takes place in OC. Several local companies received money from corporate backers or other investors and aren’t included in the survey.
Still, the fourth quarter decline is in line with a tightening of venture purse strings in the wake of the dot-com meltdown and a lackluster market for initial public offerings. Even so, OC’s drop was lower than it was nationally. U.S. venture funding fell 18% in the fourth quarter from third.
“OC has not shown spectacular highs but it has not shown big pullbacks either,” Withey said.
Along with lower funding, the number of venture financing rounds also came down in the fourth quarter. Only 14 companies received financing compared with 16 in the third quarter and 23 in the second.
“We are really scared right now looking at the market conditions,” said one Santa Monica venture capital investor.
Nationally, about a dozen companies had to defer public offerings in the first two weeks of January. Moreover, the share prices and valuations of technology companies are down sharply. For companies looking to go public, they face having to price their shares accordingly,resulting in lower returns than those venture firms saw in recent years.
So, instead of one home run for every nine failures, venture funds now are looking for less risky bets.
“That has definitely changed,” Withey said.
“They still apply the portfolio theory,” he said, but firms now are taking a cautious approach. “Days of speculating about building a brand without a business model are definitely over,” he said.
For the year, local venture financing grew 21% to $741 million, its slowest clip in the past four years. In 1999, Orange County companies received $610 million, nearly double what they received in 1998. Sixty-six companies received funding in 2000, compared with 56 in 1999.
The Money Tree survey also breaks the funding into various sectors. Some of the sectors that took a big hit in Orange County in the fourth quarter were communications, consumer and business services, and information services. Funding to companies involved in these businesses was down by 40% or more.
Still, the average deal size increased slightly in the fourth quarter. On average, a company in Orange County received $13.1 million in the fourth quarter, up from $13 million in the third quarter and $11.5 million in the second quarter.
“That is consistent with what is happening for the past couple of years as the VCs were trimming their portfolios and were focusing on the companies they had,” Withey said. “Also there could have been more second and third round
