July 26 (Bloomberg) -- U.S. venture capital spending fell almost 5 percent in the second quarter and first half, suggesting an annual investment rate of about $21 billion for a second year, a survey said.

Venture capitalists invested $5.77 billion in companies in the three months ended June 30, down 4.8 percent from $6.07 billion a year earlier. That brought the first half to $10.64 billion, down 4.7 percent from $11.17 billion, according to a survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association in Arlington, Virginia.

Venture capital spending has hovered between $4 billion and about $6 billion a quarter for 13 quarters, the survey said. Pension funds continue to put money in venture capital funds in hopes of higher returns than from stocks and bonds. Competition among venture firms to invest in companies with established revenue is driving up prices, investors said.

``When you have a solid team and solid customers, valuations are increasing quite a bit,'' said Philip Bronner, a partner of Novak Biddle Venture Partners in Bethesda, Maryland. ``Part of that is driven by the fact there's still too much capital out there.''

New Funds

In the second quarter, fund-raising rose 88 percent, as 43 new venture funds gathered $6.1 billion of commitments, according to Thomson Venture Economics.

Some venture capital firms are exploring possible buyouts of technology companies as buyout funds tap the venture investors for their skills in building companies and industry expertise. August Capital, a participant in the 2000 buyout of computer disk-drive maker Seagate Technology, recently raised $550 million for its largest-ever fund and earmarked about half for possible buyouts.

``We wanted to be positioned to take advantage of private equity-style deals,'' said David Marquardt, a founder of August capital. ``Technology is moving away from a bunch of crazy techies in Silicon Valley that built these small, fragile companies and becoming a much more integral part of the economy and business. The cash flows tend to be more stable,'' drawing interest from buyout firms.

Texas Pacific Group, which led the Seagate purchase, invited August to make a joint bid for International Business Machines Corp.'s personal computer division, a business that ultimately was bought in May by China's Lenovo Group Ltd. for $1.25 billion, Marquardt said.

``All the areas in which we do early-stage deals, we would certainly contemplate buyouts as well,'' said Marquardt, who backed Microsoft Corp. and Sun Microsystems Inc. as startups and who remains a director of Microsoft. Those areas include semiconductors, business software and Web services and computer storage and systems. He said August would work with a buyout firm, rather than initiate any future takeovers.

Renewed Spending

Also spurring increased venture capital spending has been renewed corporate spending on computer-related products and services and takeover interest in venture-backed companies from buyout funds investing new funds of their own, investors said.

Novak Biddle recently sold part of its stake in N.E.W. Customer Service Companies Inc., a provider of extended warranties on consumer products, to a group including TH Lee Putnam Ventures, Bronner said.

``We are getting interest across our portfolio from a number of potential acquirers and it's happening more rapidly than it was a year ago,'' Bronner said. Many startups would rather sell to another company than incur the costs of public-company compliance and meet the stricter profit test needed to go public nowadays.

A large buyout firm recently approached Mason Wells Venture funds about acquiring medical imaging company Terramedica Inc. as part of a series of health care-related acquisitions, said Dan Broderick, managing director of the Milwaukee venture firm. The parties didn't agree on price.

Zazzle.com

Last quarter's financings included $16 million for Zazzle.com Inc., founded by California entrepreneur Robert Beaver and his sons. Zazzle.com lets consumers create custom products such as t- shirts and stamps using digital images from artists and companies including Walt Disney Co. Zazzle.com raised $16 million from Kleiner Perkins Caufield & Byers and from Ram Shriram, a private investor who sits on the board of Google Inc.

``I do very few boards because I'm not a venture capitalist in the strict sense,'' Shriram said. ``This is something I'm very excited about.''

To contact the reporter on this story: Hui-yong Yu in Seattle hyu@bloomberg.net

Last Updated: July 26, 2005 00:02 EDT