A crucial part of the U.S. innovation system is the ready availability of venture capital to back startup companies in high-tech fields. The venture markets have been roaring in recent years-pouring private money into fledgling companies. Recent data from a variety of sources show that 1997 was a banner year for new private investment, particularly in information technology companies-and that 1998 looks like another winner.
The numbers, says Pat Gray, a managing partner at Price Waterhouse, are particularly “heartening” because they point to investments in a diverse mix of businesses and for companies at different stages of development. Investment growth, he says, “was pretty broad-based, except in biotech. Software and communications hit the cover off the ball.”
These optimistic sentiments are based on numbers from several sources. Price Waterhouse, the New York-based consulting firm, says venture capital investments climbed to $12.8 billion in 1997, up 34 percent from 1996. The company’s numbers show that most of the money-about $8.5 billion-went to high-tech businesses, such as Internet services, software companies, and computer firms.
Other groups that track venture investments paint a similar picture. Private investments have nearly doubled during the past three years, says Rolf Selvig, director of business development at San Francisco-based VentureOne.
If private investment is a crucial part of the innovation system, so is the next step in the process: the initial public offerings (IPOs) that bring public money into the startups. And there the picture isn’t quite so rosy. IPOs for venture-backed companies slowed dramatically in 1997. After a record year in 1996, the number of IPOs for startups dropped 41 percent in 1997 and the amount of money raised plummeted by 43 percent to $5.4 billion, according to VentureOne.
Regardless of the slowdown in IPO markets, there’s lots of venture money available. In fact, says Clinton Harris, an investment advisor at Grove Street Advisors in Lexington, Mass., for entrepren-eurs and venture capitalists, “it’s a wonderful time.” However, Harris raises a cautionary note. “If you’re an investor it may be worrisome.”
Harris believes the danger is that the success rate of venture-backed companies will drop. While the supply of money is growing, he says, “the availability of high-quality investments is not changing as quickly.”
Yet because of the natural lag time in venture markets, says Harris, “if there is too much money now, it will still be two to three years before the returns drop.” In the meantime, it looks as though the venture capital cog in the innovation system is turning at a high rate.