VC investments in US fall to lowest level in 4 years

Investing in start-up companies in the United States has ebbed to a new low according to a report that will be released on Tuesday by PricewaterhouseCoopers, Venture Economics of Thomson Financial and the National Venture Capital Association.

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By  Massoud Derhally Published  July 31, 2002

Investing in start-up companies in the United States has ebbed to a new low according to a report that will be released on Tuesday by PricewaterhouseCoopers, Venture Economics of Thomson Financial and the National Venture Capital Association.

Only US $5.7 billion of venture capital was invested in the second quarter of 2002, the lowest ever since September 1998. Total investments in the first quarter of 2002 dropped to US $6.2 billion, marking a 24 percent decline from the prior quarter.

Tracy Lefteroff, global managing partner of the venture capital practice of PricewaterhouseCoopers said, "As expected, total investments for the year 2002 will be well below 1999, the first of the bubble years. However, 2002 is still likely to be the fourth largest year ever for venture investing. This return to more normal historical levels also reflects the uncertain economic environment, the weak IPO market and more realistic company valuations. On the other hand, the fact that the number of companies getting venture backing has scarcely decreased is a positive indicator of future activity. Entrepreneurs are continuing to fill the pipeline."

This year's second-quarter investments - disbursed to 819 companies nationwide - fell 53 percent from the same time last year when venture capitalists doled out $12 billion to 1,376 companies, the survey said.

The Software sector retained its number one ranking, attracting the largest total dollar amount at $1.0 billion. Yet, this figure represents a 16 percent decrease from the previous quarter when venture capitalists invested $1.2 billion in the sector. All other major sectors experienced declines. Semiconductor investments fell 31 percent to $284 million. Media & Entertainment investment fell 47 percent to $161 million. And, Retailing and Distribution fell 12 percent to $394 million. Telecommunications fell 16 percent to $657 million. Computers & Peripherals experienced a slight gain of 6 percent to $185 million. The IT Services sector jumped 45 percent to $360 million, rebounding from a large drop in the prior quarter.

With the peak of the Nasdaq in March 2000 and subsequent market corrections, investor confidence has been eroded by inflated technology stock prices and poor performance of companies. Venture capitalists have also shifted ground, becoming much more selective in the type of companies and projects they invest in, ostensibly making it harder for start-up companies to secure capital.

The $5.7 billion invested by venture capitalists during this year's second quarter is 81 percent below the record $29.5 billion invested in start-ups during the first three months of 2000.

When asked to quantify the size of venture capital extended to start-ups in the Middle East, Nasri Tehini, Chescor Capital partner told ITP.net, “It is a very difficult number to pin, but our guess estimate is around US $1 billion has been invested over the last 4 years, in the GCC, Levant and Egypt.”

In a recent UNDP report titled Arab Human Development, officials and technology experts affirmed that Arab countries were lagging behind in research and development. Arab investments aboard are estimated to be around US $ 1.2 trillion, while inter-Arab investments are approximately US $15billion.

With the exception of Sub-Saharan Africa, no other region has a lower penetration rate of new technologies than the Arab world, according to Juan Somalia, the director-general of the Geneva-based International Labor Organization (ILO).

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