Just when you thought the moribund venture capital industry had sunk as low as it could, out comes news that this submarine continues to dive toward new depths.

Technology companies nationwide took in $3.8 billion in venture capital in 623 deals during the first quarter, the smallest dollar amount since late 1997 and the fewest number of companies since late 1996, according to the MoneyTree Survey by the National Venture Capital Association, PricewaterhouseCoopers and the Venture Economics research firm.
Those numbers compare with $6.2 billion invested in 787 companies during the first three months of 2002.

Officials blame investor timidity on the war with Iraq and the continuing weak economy, which has nailed shut the window for public stock offerings and slowed merger and acquisition activity for much of the past two years.

Across the Southeast, the numbers are just as bleak.

North Carolina dropped from $64.6 million in 14 deals a year ago to $58.5 million in 13 deals for the latest quarter.

Georgia’s figures really swooned, from 22 deals and $133.3 million in 2002 to 15 deals and $74.1 million this year.

Meanwhile, South Carolina reported three deals for $12.9 million in the latest quarter after not announcing any deals during the initial months of 2002.

Local Tech Wire has tracked the decline, reporting on 26 deals totaling about $225 million in capital raised so far this year in the Carolinas and Georgia. LTW’s data includes a couple of deals excluded by the MoneyTree Survey because they aren’t pure venture capital plays, such as a $63 million deal for New South Communications of Greenville, SC, which was led by New York buyout firm Kohlberg Kravis Roberts.

‘Dismal’ quarter

“It’s sad numbers, no doubt about it,” says Jeff Barber, who heads the Raleigh office of PricewaterhouseCoopers. “I would have sworn that we had hit bottom and were coming back, based on the numbers we saw last year.”

A year ago, North Carolina venture activity picked up steam during the second and third quarters before tapering off a bit in the fourth quarter. But even the $153 million raised in the final months of 2002 was higher than almost every quarter before the Internet bubble of 1999-2000, Barber says.

“This just shows how dismal this quarter was,” he says, noting the latest state figures are the lowest in six years.

Ten of the latest deals were in the Triangle, while two were in Charlotte and one was from Winston-Salem, which also happened to be the largest deal: $14 million for biotechnology firm Targacept.

Yet Targacept was the only biotech deal in North Carolina during the quarter, as software appears to be regaining favor among investors after a long drought with six deals statewide. Meanwhile, investors also seem to be sticking with their favorite oldies, as most deals were follow-on rounds.

No telecom deals

Georgia’s nose dive can be attributed to a lack of later-stage telecommunications investments, according to Wes Getman of PricewaterhouseCoopers’ Atlanta office. Such deals drove the state’s numbers over the past few years, but with the sector in the doldrums, there isn’t much to attract investors, he says.

All of Georgia’s deals were from the Atlanta area, led by IT services provider Prenova raising $15.5 million. Again, software was the favored sector with about a half dozen investments.

“The bulk of our investing is coming from out-of-state firms, so people are looking at us but are just overly cautious right now,” Getman says, noting the state’s figures are its lowest since early 1998.

Getman says the second quarter will be a pivotal one for many entrepreneurs seeking investments since summer vacations and holidays normally slow venture activity over the second half of the year.

But Barber, who has predicted an industry upturn for several quarters, remains ever the optimist. “There comes a point where you can’t go any lower, and I think we’re pretty much there,” he says.

MoneyTree Survey: www.pwcmoneytree.com