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It’s official — the first quarter really was as bad as it seemed for tech deals. Venture capitalists slashed their investment activity by 40 percent in the first quarter of 2001 from the fourth quarter of 2000, according to the PricewaterhouseCoopers MoneyTree Survey in partnership with VentureOne Corp. The survey, released last Wednesday, is the most recent installment of the ongoing quarterly study of private equity investment activity. The survey reveals that private company investors, primarily venture capitalists, put to work just $10.11 billion in the first quarter. That compares with $16.8 billion that investors pumped into growing companies during the previous quarter. The number of individual financings has dropped nearly as much. Investment rounds numbered 692 in the first quarter while VCs got together and financed 1,051 separate deals in the fourth quarter of 2000. More importantly, the declining investment dollars show how fast and far deal activity has dropped since the stock market — and the economy — started to plummet early last year. And the numbers could keep falling. The dollars invested so far in 2001 are still almost double the $5.88 billion that VCs and others pumped into private companies in the first quarter of 1999. It was during the first three months of 2000 that both investment capital levels and the Nasdaq reached historic peaks. Private investors put $26.10 billion into companies, and the Nasdaq topped 5,000 points for the first time. Since that time, both numbers have dropped, and Silicon Valley lawyers and VCs are hoping both are bottoming out. For its part, the Nasdaq on Wednesday gained 52 points to close at 2,220, another sign of life as that tech-heavy market creeps back up from a post-tech boom low of 1,638 points on April 4. But it’s too soon to tell whether investment levels will begin heading in an upward direction as well. “We’ve gone through a very explosive period, almost euphoric, and as fast as it went up, it’s come down,” said Mario Rosati, a Wilson Sonsini Goodrich & Rosati partner. “I hope we’re at the bottom, and things will start coming back to a more normal level of business,” said Rosati, who joined the Palo Alto, Calif.-based firm in 1971 and has weathered a few business downturns. “I can’t point to tangible evidence, but I am left with the feeling that people are becoming somewhat optimistic,” Rosati added. If anything, the situation could get a little worse before it gets better. The median amount the VCs are putting into deals is still relatively high. In the first quarter, the median investment was $13 million, compared with $10 million in the fourth quarter of 2000. And in the first quarter of 2000 — at the height of the Nasdaq and VC activity — the median was $11.38 million. So at this point, there isn’t much evidence to back up the optimism — although it’s echoed by many Valley lawyers. They are reporting a handful of financings for early-stage technology or infrastructure companies and for more developed companies that venture capitalists deem worth saving. Some are even seeing minor bidding skirmishes over companies that appear in overall good health despite the economy’s doldrums. Historically popular industry segments are also still drawing the capital. Communications companies pulled down the most money, scoring $3.02 billion. Software companies commanded $1.90 billion, and consumer and business services attracted $1.73 billion. VCs have spent the past several quarters examining the companies they backed in recent years. They’re saving the ones they think still have a shot at an initial public offering, perhaps next year. “They’ve worked through a lot of the problems in their portfolios, and they sort of took a time-out,” said Cooley Godward partner Mark Tanoury. Entrepreneurs needed a cooling-off period as well, Tanoury added. They were continuing to demand high valuations for their companies even while the value of already public competitors was plummeting. “VCs needed the expectations of the entrepreneurs to come down and that’s happened,” Tanoury said. “We all knew VCs were sitting on a lot of money and would have to start making investments.” VCs certainly are under pressure to put to work the money they’ve raised in recent years. A case in point is Menlo Park, Calif.’s Sigma Partners, which raised $600 million in February and did five deals in the first quarter of this year. Wade Woodson, a Sigma Partners general partner, said that with prices falling, the time is ripening for investing. “The venture business has always been cyclical,” Woodson said. That seems to be the case in practice so far. The handful of deals that have crossed the desk of Allison Leopold Tilley, a Pillsbury Winthrop partner in Palo Alto, in recent months are dropping in value. “Valuations have declined a bit,” Tilley said. But still, she’s optimistic, too. “I don’t see the Valley dropping off the face of the earth.”

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