Four years after the Internet bubble burst, the venturecapital industry is stirring back to life.
Investments by venture firms rose 22 percent in the second quarter of this year, from $4.7 billion a year earlier to $5.8 billion, according to a survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association MoneyTree. For all of 2004, analysts project an 11 percent increase in investments, from $18 billion in 2003, to $20 billion.
That is a far cry from the $108 billion in the heady days of 1999, and nobody in the venture-capital business is predicting a return to that flood of cash. Rather, ‘‘it’s as though the turtle got out of its shell, looked around, and decided it was safe to go out,’’ said Jesse Reyes, vice president for global research for Thomson Venture Economics in New York City.
Venture capitalists cite several factors for the improving situation, starting with the reviving economy. Forecasts of increased technology spending by corporations are also fueling the uptick, they say. Then, there is the simple matter of time. After spending several post-bubble years licking their wounds and propping up existing companies in their portfolios, venture capitalists are finally looking around for new investment opportunities.
As for entrepreneurs, many more are now willing to come forward with innovative ideas than during the years immediately after the Internet debacle. ‘‘Before, entrepreneurs were hunkered down, unwilling to take a risk in such a terrible environment,’’ said Geoff Yang, a partner in Redpoint Ventures, in Menlo Park, Calif. ‘‘But, now, they’re coming out of hiding.’’
Yang and other venture capitalists report significant increases in the number of deals they are looking at these days, especially in start-ups. He estimates that the number of investments his firm is considering is up 40 percent to 50 percent from a few years ago.
The competition among venture capitalists to get their foot in the door of promising companies has also heated up. The time that elapses for a deal to close has been cut by more than half, from six to eight months two years ago to two or three months today, said Bill Ericson, a general partner with Mohr, Davidow Ventures, another Menlo Park firm.
Perhaps the most encouraging development for entrepreneurs is the increase in venture-capital investments in early-stage companies, to 231 in the second quarter of 2004, the highest number in two years.
These deals accounted for 30 percent of all venturecapital investments, the highest proportion in more than three years, while the average capital infusion per company rose to $4.9 million, up from an average of $4.6 million over the previous four quarters.
What is more, seed funds — money invested in startups, which venture capitalists shunned after the bubble burst — accounted for 32 percent of all deals in the second quarter of this year, up from 29 percent for all of 2003, said John Gabbert, vice president for worldwide research at VentureOne, a market research firm in San Francisco.
Some firms have decided it is time to plunge into a suddenly promising market.
Mark Hilderbrand, a general partner in Onset Ventures, in Menlo Park, which focuses on early-stage companies, says it expects to make as many as 10 investments this year, up from just one last year.
Such renewed enthusiasm has been good news for entrepreneurs like Fred Khosravi. Two years ago, Khosravi founded a company called Access Closure, in Mountain View, Calif., to develop and sell a technology to improve angioplasty procedures. He had a tough time finding takers, although in late 2002 he managed to raise $3.5 million from Onset and private investors. A year later, he raised $10 million more from a group that included Three Arch Partners and Onset.