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World events hit US venture capital hard in 2003; investment slowest for five years

Geopolitical uncertainty has hit the US venture capital industry hard in 2003 with quarterly investment levels dropping below $4bn for the first time in five years, according to the Ernst & Young/Venture One Venture Capital Survey.

Just $3.4bn was invested in 404 deals in the first quarter of 2003, a decline of 21 per cent and 12 per cent respectively. The average value of an investment fell from $6.6m in the fourth quarter of 2002 to $6m so far this year, reflecting increased risk aversion in the industry and softening valuations.

Don Williams, Pacific Southwest Venture Capital Advisory Group leader at Ernst & Young believes that the statistics, whilst directionally correct, may paint an unfairly pessimistic picture for venture capitalism's long-term prospects.

‘The first factor that cannot be quantified is the impact that world events and the Iraqi conflict had on possible investments,' said Williams. ‘Additionally the first quarter is often an administratively focused period for many of the fund partners as they deal with year end matters.'

Whilst most sectors saw declines in investment levels some isolated IT segments actually saw significant increases in investor activity. Information services experienced a 70 per cent jump in the first quarter to $188m. Investment in semiconductors increased by 38 per cent and was bolstered by the quarter's largest deal, a $52m later financing round completed by Matrix Semiconductor.

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