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The collapse of Internet and telecommunications stocks in mid-2000 closed the IPO markets for all technology companies, damping the enthusiasm of venture capitalists, who frequently look to IPOs to repay them for their efforts. But with the revival of the IPO markets in 2004, venture capital financing is slowly returning, at least for more mature startups. Venture capital and private equity investments in 2004 were roughly $20 billion, a slight increase from $18.7 billion in 2003, according to estimates based on the annual end-of-the-year survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. And the prices of deals—especially deals with later-stage companies—are creeping back up. “We’re seeing deals that wouldn’t have gotten funded one or two years ago,” says Allan Ferguson of 3i, a leading venture capital firm.

There are even encouraging, albeit tentative, signs of a renewed interest in early-stage startups. The valuations for companies receiving their first few rounds of venture investment remained flat from 2003 to 2004 and are still below 2000 and 2001 levels. But according to VentureOne, a venture capital research firm, early rounds of venture funding represented 33 percent of all rounds in the United States in 2004, reversing a downward trend that started in 2001, after early-stage venture investments peaked at 54 percent of the total in 2000.

In addition to the improved prospects for exit strategies, another reason for the rising prices of venture deals (at least four startups, Jazz Pharmaceuticals, RiskMetrics Group,, and Vonage, each raised more than $100 million in 2004) is that limited partners—the pension funds, endowments, and others that provide the capital to venture funds—are putting their money to work again, investing it in venture capital funds. At the same time, billions of dollars committed to venture capital funds since 2000 remain unspent. Venture capitalists are coming under pressure to invest this money soon; the consequence is that more companies are getting funded, and later-stage deals are getting bigger.

But for the most part, companies just starting up are still struggling. And venture funding for one of technology’s most speculative, albeit promising, fields has been one of the biggest casualties. Venture funding for nanotechnology dropped from $386 million in 2002 to $200 million in 2004, according to New York City–based nanotech market research firm Lux Research. That means nanotech startups are finding it harder to do research in areas that could have tremendous long-range impact: new nanomaterials for optics and chip-cooling systems; biological diagnostics based on ultrasensitive nanosensors; and smart, automated delivery systems for protein drugs. “Over the years, the financial community has pushed for shorter-term results,” says Peter Garcia, chief financial officer of Nanosys, a nanotech startup based in Palo Alto, CA. “There are projects that are more long term technically that have the greatest potential to change how products are made, but the funding is not there.”

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