U.S. venture capital investment - the money invested in new enterprises - was 66 percent lower during the second quarter of 2001 than it was at the same time last year. This is the sixth quarter in a row that U.S. venture capital investments have fallen.
The drop has created concerns because venture capital spurs entrepreneurial activity, which in turn spurs technological innovation, which, in turn, increases national productivity.
But Dee Powers, co-author of the book "Inside Secrets to Venture Capital," says the drop is not a drop at all. Rather, she says, it is a return to normalcy after the unprecedented escalation of venture capital investment in late 1999.
"It goes back to the beginning of 1999," Ms. Powers points out. "The first two quarters there are representative of strong venture capital investments, but maybe not hysterical venture capital investments. It is really a correction, where we are getting back to normal levels."
PriceWaterhouseCoopers analyst Kurt Walden agrees. "The Internet Gold Rush," he says, "where business plans that really amounted to one side of one piece of paper could attract two and three and four million dollars in funding, those days are gone."
And good riddance to them, Mr. Walden says, since so many of the businesses funded during the "Internet Gold Rush" ended up in bankruptcy.
Dee Powers says it is not unusual for investors to get a bit carried away when new technology arrives on the scene. Indeed, she says, the late 1999 period of overly exhuberant investing has historic precedent. "If you go back to the railroad, there were a lot of investments and a lot of them failed," she says. "It was the newness of the transcontinental transportation. I think that failure rate is not terribly unusual."
Nonetheless, analyst Kurt Walden welcomes a return to rational investment. Business creativity is not being stifled today, he insists, it is just more disciplined. "Venture capital firms have plenty of money left to invest, but they are doing it more cautiously," Mr. Walden says. "Only the very, very best companies the ones with the highest potential - are getting funding from venture capital firms."
Mr. Walden says the United States still leads the world in venture capital, with more than five times as much investment money available to new businesses as the United Kingdom, which ranks second.