VCs Will Cover Common Ground In '02

Despite signs the economy could rebound, venture investors are proceeding with caution and focusing on familiar territory, but a rise in corporate spending could cause VC purse strings to loosen.
A trying year is about to give way to a new one filled with the hope of economic and psychic recovery, but venture capitalists are still singing the same old tune.

Sure, the public markets warmed to tech stock debuts in December, and the economy shows signs of shrugging off its malaise. There are even hints that corporate profits--key to increased spending on the products venture-backed startups produce--are rebounding. But it's all like a faint beacon in foggy, uncharted seas.

The same drum still beats within the VC realm: It's back to basics. The technologies that will be popular in 2002 are the same things that have been at the top of the list for more than the past year: enterprise software, broadband and software for Internet infrastructure, and life sciences. And investors are still spending the majority of their time working with companies in their portfolios rather than looking for new investments.

There is a twist, though. "You're going to see basic technology development rather than companies applying existing technology in new ways," says Kirk Walden, national director of VC research at PricewaterhouseCoopers. In other words, money will go to entrepreneurs who've come up with a way to design a chip from scratch as opposed to simply bundling together or commercializing something the industry already uses. "An easy example is" application service providers, he says. "What's attractive about a new ASP is the underlying software, the application it's providing, not the fact that it happens to be an ASP."

At least one industry group has a positive outlook for the coming year. "Large technology companies have been limiting their spending on new technology, and that has hurt the type of company that VCs normally invest in," says a spokeswoman for the National Venture Capital Association. "The hope is that inventory levels are lower again and larger technology companies will start buying again." So watch the fourth-quarter results of Sun Microsystems and Oracle and Intel--and all the blue chips, for that matter.

What else to look for in early 2002: the throttle on initial public offerings, which give investors the chance to cash out their investments. Lawson Software, NetScreen Technologies, and Nassda all went public in December with better-than-expected results. Since venture investments typically lag six to 12 months behind what's happening on the stock market, it could be a while before startups reap the benefits. "There's a lot of potential IPO companies backed up like a bad septic tank," Walden says. "Even when the market opens up, it will be very selective."

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