Southern California venture investment trends consistent with national

August 5, 2002

Southern California mirrored national investment trends with a rise to $302 million in healthcare investments over last quarter's $282 million-a 7% increase, and a dramatic 36% drop in IT investment - $146 million down from the $401 million in Q1, according to Ernst & Young and VentureOne's joint global venture capital survey. There was a total of $501 million invested in the region in Q2, down from Q1's $737 million.

With $5.1 billion raised in 538 deals nationwide, venture capital investing in 2Q'02 was on par with the previous quarter's activity. On the whole, the 3% increase in the number of transactions was tempered by lower investment per deal, resulting in a 7% drop in the amount invested. However, investors are increasingly funneling cash toward healthcare companies, which enjoyed a banner quarter, and away from information technology startups.

"The numbers do not surprise us with the path to profitability so unclear today," noted Don Williams, partner and leader of Ernst & Young's Pacific Southwest Venture Capital Advisory Group. "We're concerned that the record low level of first and second round financings will have a long-term impact on deal flow and subsequently the entrepreneurial market and future economic development."

In light of the recent gloom surrounding telecommunications, investors are shying away from connectivity products and connectivity software, and this is dramatically affecting the capital allocated to information technology ventures," said John Gabbert, Vice President of Worldwide Research at VentureOne. Indeed, most of the fall-off in the communications and software sectors is attributable to diminished transactions involving connectivity-related companies.

With U.S. healthcare expenditures growing at 10% a year and a much longer investment cycle for healthcare startups, venture capitalists focused on healthcare are undeterred by current public market instability. The amount invested in healthcare companies rose 42%, to $1.7 billion, while deal flow grew 32% from last quarter. Healthcare investment is now at its highest level since 4Q'00 and in fact, exceeds all quarterly totals outside the year 2000. Furthermore, healthcare companies now receive over one-third of all venture capital investment, whereas during the Internet boom their allocation was in the single digits. Within healthcare, investment increased across the board in healthcare services, medical devices, medical information systems, and biopharmaceuticals.

Healthcare's increase comes at the expense of information technology, which has seen its share of investment drop to 49%, the lowest level in years. Just $2.5 billion were invested in 273 IT deals in 2Q'02. The primary driver of this decline is the deterioration in communications and networking investment, which fell 50%, to $849 million. Software losses were also significant, with investment dropping 29%. For both sectors, this was the first quarter of sub-billion-dollar investment since 1998.

Increased investment in semiconductors and electronics saved the IT group from even grimmer results. Application-specific integrated circuits, which hit a three-year low in 1Q, bounced back somewhat this quarter, and a few large electronics deals upped the totals for that segment.

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The investment figures included in this release are based on aggregate findings of VentureOne's proprietary US research. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. Copyright © 2002, VentureOne.

About VentureOne

VentureOne, the leader in venture capital research, offers investors and entrepreneurs the most comprehensive and accurate information on venture-backed companies, as well as world-class events, industry analysis, and customized research. Venture capital firms, corporate investors, investment banks and accounting and law firms around the world use VentureOne's products to identify private investment opportunities, perform due diligence, and evaluate market trends.

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