Venture Investments Increase in Healthcare at the Expense of IT

August 5, 2002

by Ketaki Sood, Larta Research Economist

Venture capitalists have been cynical about investing in information technology ever since the market crash and now, with the Worldcom debacle and following turmoil in the telecommunications sector, investors are shying away even more from allocating capital in IT. According to a report released by Ernst & Young and VentureOne, investment in IT was a meager $2.5 billion in the second quarter of 2002, and contributing to this decline was a fall in communications and networking investment, which fell by 50%, to $849 million.

Amidst such pessimism in IT investment was an increase in venture capital investment in healthcare, which increased by 42%, to $1.7 billion in the second quarter of 2002. According to Ernst & Young data, the healthcare sector now receives over one-third of all venture capital investment, with medical device products and biopharmaceuticals capturing a lion's share of this investment.

Venture capitalists continue to focus on their existing portfolios of companies, rather than finance new high tech start-ups, given the current state of capital markets and concerns regarding sustaining such companies. The declining number of seed and first-round deals could have a considerable impact on the long-term growth of the IT industry. According to the PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTreeTM Survey, expansion stage companies accounted for 66% of total dollars invested, as opposed to only 19% of funds that went to early stage companies. Says Mark Heesen, President of the National Venture Capital Association, "Venture capitalist's today must be able to continue to preserve capital and support their existing companies that are weathering the storm. Yet, they must also be in a position to keep their 'eyes on the prize' and find the new companies that will be the winners five to seven years from now. History tells us that some of tomorrow's most successful companies will be funded during today's down cycle."

Return to this week's issue of LA VOX >