Venture capitalists in search of an exit strategy are finding opportunities to be fewer and fewer in a still-tough economy.

VCs raised $1.96 billion through IPOs and mergers and acquisitions in the first quarter of 2002 – a whopping a 40 percent decline in exit volume from the previous quarter, according to a report released by Venture Economics and the National Venture Capital Association (NVCA).

The drop in activity, according to the report, was primarily due to a slowdown in IPO volume, which accounted for only four offerings worth $376 million. M&As continued to be the exit method of choice, resulting in proceeds of $1.59 billion, but even that total represented a drop from $1.84 billion in the fourth quarter of 2001.

“The continued low level of exit activity confirms that recovery in the venture capital industry remains elusive,” NVCA President Mark Heesen said in the report. “An increase in venture-backed IPO’s or venture-backed M&As will be an important indicator of recovery in all other venture capital related metrics, such as the level of investments, fundraising and performance. An increase in information technology spending among major corporations and stability in the public markets are two factors that are critical to recovery in the venture capital community.”

In eight of the last nine quarters, both the number and volume of M&A transactions have exceeded that of IPOs. The latest numbers indicate that the surge of IPO activity in the fourth quarter last year, when IPOs accounted for 44 percent of exit volume, was an anomaly, according to the report.

There were 17 software deals with disclosed values of $151.5 million, which was almost twice the number of deals of the second-most-popular sector, IT services. The industry sector that raised the most proceeds was Networking and Equipment, with four deals valued at $471.2 million. However, software has seen the most M&A activity in each quarter going back to 2000.

While software remained the most active sector, some of the quarter’s largest deals came from a wide variety of sectors. For example, Ocular Networks, an optical networking equipment provider, was last quarter’s biggest deal. Tellabs acquired the company in January for $355 million. The second largest deal was Cumulus Media’s purchase of the commercial communications firm, Aurora Communications, for $223 million in late March.

Venture Economics:

National Venture Capital Association: