Venture capitalists have been in survival mode for what seems like an eternity. Investments fell to their lowest level since mid-1997 during the first quarter of this year, with just $3.8 billion going into 623 companies, according to data released on Apr. 29 by The MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Assn. Experts blame the poor economy, the war in Iraq, and the hangover from the technology bubble for the venture-capital industry's continued troubles.
Still, some signs show that venture capitalists are readying to turn the corner, both in terms of total dollars they invest and the number of new companies they seed. BusinessWeek Silicon Valley Senior Correspondent Linda Himelstein spoke with two veteran venture investors, C. Richard Kramlich of New Enterprise Associates and Gary Rieschel of Mobius Venture Capital, to find out how they view the state of their markets and what kinds of companies are showing the most promise, particularly when it comes to e-business.
Q: Do you think the venture-capital industry has bottomed out?
Rieschel:Yes. We were more active in the first quarter than at any other time since 2000. I think we'll probably do 20 new deals this year, compared to nine last year, which was our low.
Kramlich: I think the first quarter will be the nadir in terms of the rate of venture investment. We have turned a corner from a funding standpoint. Before, you only had monetary policy for you, with the economy and psychology against you. Now, the psychology part has shifted. So you have two factors going for you. If we can get the economy straightened out, then we'll be firing on all cylinders.
Q: Given your optimistic comments, how much of your activity will involve e-business? Please give some examples of your portfolio companies in the sector that show promise.
Rieschel:If you include any kind of consumer or business service, then probably 80% of our new deals will be in the e-business category. Our sweet spot has always been in the services sector.
One of our newest deals is AuctionDrop. eBay (EBAY ) identified a sector of the market that clearly has a lot of untapped demand. There is a huge number of buyers relative to the number of sellers. So AuctionDrop helps make it easier to get products on eBay. It's a real consumer service.
In December, we funded another company that makes virtual network software. It allows media companies to create networks. We take care of customer acquisition, customer service, and billing. It's an enterprise deal, but it also benefits consumers.
Kramlich: We mostly do infrastucture deals -- a lot of enabling kinds of technologies in networking and the wireless area. A lot of this relates to e-business. The common denominator for what we're doing is information access. For example, Financial Engines is a company that allows people to have ready access to their 401(k)s and IRA rollovers. It went cash-flow-positive in the first quarter. We cover 4.2 million people in 1,100 companies and are growing more every quarter.
Q: What kinds of companies and technologies are you looking to fund in the future? What do you think will be hot with respect to e-business?
Rieschel:The next generation of technologies will get into doing transactions from PDAs and cell phones. That's the next level. The market isn't quite there, but it will be. We're looking at things to facilitate transactions on any device.
Kramlich: A cell phone is becoming a ubiquitous instrument, not only for communicating but for imaging and playing games. One cell-phone manufacturer says it will have 15 million phones equipped with cameras by 2006. So we're playing off things happening in society. These are things nobody decreed. It just happened.
A year ago, we funded Sorrent. It's a company that develops games for cell phones. It uses wireless technologies. And we will look to invest in other wireless companies and technologies.