Venture Activity Stabilizes in 4Q; Officials Forecast Slow Growth This Year

RALEIGH — The worst may be over for the entrepreneurial community, which has suffered through a prolonged drought of available venture capital, but it will be a long, slow road before things are lush with green again and the flood of cash young technology firms saw a few years ago will likely never return.

Those are the findings and assessments of the latest MoneyTree Survey, a quarterly gauge of venture activity that is produced by accounting firm PricewaterhouseCoopers, the National Venture Capital Association and Venture Economics news service.

In the last three months of 2001, $83 million was invested in 14 North Carolina companies, up from the $74 million a dozen firms raised in the third quarter. That marked the first increase since the second quarter of 2000. Still, these latest amounts are the lowest since the third quarter of 1999, when $54 million was put into 15 companies statewide.

Those numbers track with national trends as well. About $7.1 billion was invested in 856 deals nationwide in the latest quarter, up slightly from the $7 billion in 810 companies in the third quarter. Again, that was the first quarterly increase since the Internet bubble burst nearly two years ago.

Bottoming out?

"I think we've hit bottom with the activity we're seeing," says Jeff Barber, who heads PricewaterhouseCoopers' technology practice in North Carolina. "Hopefully, it's not a false bottom with a rush of deals before the end of the (2001) year and we'll continue to see growth in the coming months."

Some of the top area deals late last year included $23 million for Arsenal Digital Solutions of Durham, which sells data-storage services, $17 million for HAHT Commerce of Raleigh, which produces software that manages customer relationships, and $10 million for Elogex of Charlotte, which provides logistics services.

Software companies garnered the most venture cash in North Carolina last year, at $129 million in 23 deals. That was followed by biotechnology firms, which netted $92 million in 10 deals.

Those two sectors outpaced national averages: Software accounted for 26 percent of North Carolina investments and just 19 percent nationally, and biotech represented 18 percent of the money invested statewide and a mere 3 percent across the country. But the size of an average venture deal in the state, $6.7 million, continues to trail the national average of $9.3 million.

For all of last year, North Carolina firms raised $501 million in 75 deals, about 66 percent more than the $294 million raised in 80 investments in 1998, the last year before the land rush to finance dot-coms that inflated company values and sent funding levels into orbit.

"If you forget about 1999 and 2000, which were really aberrations, we're looking pretty rosy," Barber told a sparse and rather subdued audience at an invitation-only breakfast Wednesday.

'All VCs are chicken, Mumma says

Two Tar Heel venture capitalists echo Barber's cautious optimism about the current market and forecast a swifter deal flow by late this year and early 2003.

"All VCs are chicken and have been inwardly focused for some time," says Mitch Mumma of Durham-based Intersouth Partners. "We saw a period where a lot of companies never should have been invested in and a lot of investors never should have gotten their hands on any money. I think the entrepreneurs out there now are more interested in building companies than making money, and we'll get behind them."

Richard Maclean of Charlotte-based Frontier Capital agrees that the depressed market for public stock offerings and, consequently, stock-fueled mergers and acquisitions has forced financiers to stick with the companies they know until the market becomes more liquid and the venture money can be cashed out.

"We have to hold onto companies longer than expected and learn to love them," Maclean says.

Yet, he sees "a flight to quality" among venture capitalists, saying good companies are seeing more funding options now than they have in the past couple of years.

He and Mumma define good companies as those with a track record of hitting milestones, either by advancing studies of potential drugs or lining up customers for new information technology or telecommunications products or services.

"Venture capitalists didn't conduct due diligence for two years, and we have to get back to that," Mumma says. "Market acceptance is important to increasing the value of a company, and the way to show that is through customers."

Funding list

Company, Industry, Amount($MM)

Arsenal Digital Solutions, Durham; IT services; $23.0

Bloodhound Software; Research Triangle Park; Software; $4.4

BlueBolt Networks; Durham; Software; $0.5

ChemCodes; Durham; Biotech; $7.0

Elogex; Charlotte; Retail/Distribution; $10.0

GadgetSpace; Cary; Telecom; $0.1

HAHT Commerce; Raleigh; Software; $17.0

iReadyWorld; Charlotte; IT services; $6.0

nTouch Research; Raleigh; Biotech; $0.66

Relativity Technologies; Cary; Software; $2.0

Serenex; Durham; Biotech; $1.5

Trinity Convergence; Raleigh; Software; $0.18

Yellowbrick Solutions; Morrisville; Software $6.2

Zoom Culture; Chapel Hill; IT services; $4.5

TOTAL 83.0

For more details of the MoneyTree Survey, visit www.pwcmoneytree.com.