Steady Growth for Venture Capital in Midst of a Turbulent Market

Disbursements
The amount of capital invested by venture capital funds rose to $16.02 billion in 1998, a 12 percent increase from 1997. Companies in the computer software and services sector received over $5.4 billion, or over a third of the total invested, outpacing the almost $2.8 billion invested in communications companies. In addition, medical and health related companies received over $2.2 billion. Expansion stage companies had almost $6.9 billion in investments. California continued to receive the most disbursements-almost $6.5 billion. Massachusetts followed with over $1.8 billion, while Texas, New York, and Colorado rounded out the top five.

Venture Capital Commitments
Optimism abounded in this sector of the venture capital market in 1998. For the seventh straight year, venture capital commitments increased as 198 funds raised a record $24.01 billion in 1998. This was a 64 percent increase in the amount of capital raised in 1997, and an 8 percent increase in the number of funds raised. In addition, the average fund size for funds raising capital in 1998 increased to $134.3 million from $91 million in 1997.

Venture-Backed IPOs
Following the trend of the overall initial public offering market, venture-backed IPOs were below the 1997 pace, as only 78 venture-backed companies went public in 1998. Although overall numbers were lower, there were several optimistic indications that the public market remained a viable exit avenue. The average offering size increased 39 percent from the previous year to $49.2 million. Also, several venture-backed IPOs showed tremendous aftermarket performance, including eBay, which rose 1,240 percent in share price from IPO date to year-end, and Inktomi which rose 619 percent in share price from IPO date to year-end.

Venture Capital Performance
The phenomenal returns the industry has experienced for the better part of the decade have slowed to a more modest rate as venture capital funds returned 9.6 percent for the year ending September 30, 1998. This was due in large part to the slowdown in the venture-backed IPO market. Fortunately, the instability of the public markets has not affected the long-term performance throughout any of the private equity sectors, as venture funds returned 32.2 percent for the three-year investment horizon ending September 30, 1998, and buyout funds returned 18.1 percent for the same horizon. It can be expected that as the public market sector and specifically the IPO market begin to rebound from the latter half of 1998, short-term returns will again soar.

More detailed analysis of these totals will be available in the upcoming National Venture Capital Association (NVCA) Annual Report (due to be released in early April) and through Venture Economics' VentureXpert online databases, which can be accessed via SDC Platinum, Securities Data Company's proprietary Windows® software. VentureXpert is the official database of the NVCA.

For more information contact John Taylor at the NVCA at 703.524.2549, or Toby Walters at Venture Economics at 973.645.9619.