During the Internet boom years, venture capitalists were the glamour girls and boys--mostly boys--of the New Economy. With big bets on high-risk companies, many without revenues or even business plans, venture capitalists anointed millionaires by the dozens, along the way adding millions to their own net worth.
The significance of venture investment to Next Wave's readership may not be obvious, but venture capitalists--who, by the way, still exist, even if you haven't heard much about them lately--have much in common with scientists-in-training. Both groups are focused on new technologies and scientific breakthroughs. Both groups have stakes in the future of high-tech enterprise in general, and of specific key scientific breakthroughs and technologies.
The ability of scientists-in-training (especially those who plan private sector careers) to plan for the future, and of venture capitalists to make money, depends on the success of scientific and economic prognostication: Which scientific fields, which technologies, will yield revenues and jobs in the future, with a sustained demand for resources, human and otherwise? Which ones will end up as duds, destined to go nowhere, with few opportunities even for the most gifted science and technology professionals?
Venture capitalists may risk tens of millions of dollars on a single investment (although in the present climate high-risk, large early stage investments tend to be rare). Smart VCs hedge these bets by spreading their money around, to different industries and even to different companies within an industry.
Science trainees risk money, too, but mostly they risk their valuable time. Training for a career in science takes a decade or more, and there's no way to know what the job market will look like years from now. After 4 years for a bachelor's degree, 6 for a Ph.D., and several more as a postdoc, who knows whether your chosen field will still be vibrant? Who knows if there will be research grants and jobs? Furthermore, science trainees--indeed, people contemplating any kind of career--have no practical way to spread the risk around.
Prognostication is hard, maybe impossible, but that doesn't keep us from trying. VCs, with mere money on the line, carefully screen every investment opportunity, practicing "due diligence"--assessing the size of potential markets, the strength of new management teams, and other factors likely to affect the prospects of new companies. Ideally, science trainees would follow a similar procedure before deciding where to risk their futures.
Science trainees, however, have little information or experience to guide them, and they lack the resources they would need to perform the science-career equivalent of "due diligence." It's hardly practical for a future job-seeker to hire a staff of economists and industry analysts. Buried in work, hard-pressed to look beyond the next iteration, science trainees typically have no idea what the future holds. Eyes averted, many science graduate students and postdocs martial on, trying hard not to think about the future.
Is there a better way? VCs have a fairly standard methodology that they can follow when contemplating a major investment. Investors practicing "due diligence" have a cookbook to follow, a set of bullet points to examine and check off. No such thing exists for science trainees aiming to make sound career decisions. So what are we to do? What is the science-career equivalent of "due diligence?"
This is a big question, one that Next Wave will be attempting to answer in the coming months and years. This article is a starting point. But where do we start? One approach is to gauge the attitudes and opinions of the people who make serious financial bets on the future of science and technology. Once again, we turn to the venture capitalists. When VCs make an investment in an industry, they're betting that the industry--or at least the part they're investing in--will be able to make money, with revenues, profits, and--most important for our purposes-- employees a few years down the road. Their prognostications are hardly infallible--the bursting of the Internet bubble proved that--but they may be the best long-term indicator available of the future vigor of particular parts of the science and technology economy.
So what are they thinking now? How optimistic are the venture capitalists? What are they betting on? Venture investor confidence is modest, but it is increasing. As usual, science and technology investments are among the favorits.
After the Internet bust, the flow of venture capital declined precipitously and has stayed low--below what many experts think was justified by economic conditions of the last couple of years. Investors stayed on the sidelines, licking their dot-com-inflicted wounds. The first quarter of 2003 marked the second straight quarter of declining investments, and continued an extended period of tepid investments. According to the joint PriceWaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association quarterly MoneyTree Survey , venture capitalists invested in 647 companies in the U.S. during Q1, with a total investment of nearly $4 billion. Roughly 93% of these deals were in science- and technology-related industries. The size of the average deal was $6,167,000.
The second quarter, however, showed a modest increase in total venture investment. Total investment rose nearly 10%, to $4.3 billion. The number of companies that received investment increased to 669. This level of investment is about the same as the level in 1996, just before the Internet boom that peaked in 2000.
The change in investor attitudes over previous quarters is even more dramatic than those numbers reveal. Investors aren't just investing more money than they were earlier in the year; they're investing a lot more money in riskier, earlier-stage companies. Early-stage companies received $956 million dollars in new investment during Q2, up 43% from $668 million the previous quarter. That's the first significant increase in early-stage investment since the fourth quarter of 1999. In Q2, early-stage companies accounted for 22% of all venture capital dollars, compared to 17% the previous quarter.
So what do the experts make of these changes? Tracy Lefteroff, global managing partner of the venture capital practice at PriceWaterhouseCoopers, is cautiously optimistic: "The signs are encouraging, if not yet definitive. Venture capital appears to be settling out at its natural level. Quarterly investing in the $4 billion range is sustainable and well in line with historical norms. Serious entrepreneurs can be cautiously optimistic at this point."
Mark Heesen, president of the National Venture Capital Association, takes a similar if somewhat more cautious view. "Is this quarter a harbinger of a dramatic turnaround in venture capital investing? It's not likely," Heesen commented. "The venture industry invests based on anticipated future market conditions, so before we declare a trend reversal we must first see a sustained opening of the IPO [initial public offering] market and consecutive quarterly increases in corporate capital expenditures. That being said, the venture capital industry is actually in a good place right now--not withholding money, but not spending it freely, either. A few more quarters at this pace would be healthy."
What industries are venture capitalists investing in?
While the New Economy bubble may have burst long ago, information technology is still the darling of venture capitalists. In Q2, software companies attracted $864 million, up 7% over Q1. Software company investments were about 20% of all venture investments.
But biomedical science made major inroads in the second quarter. Though still trailing software in total investment, biotechnology companies saw bigger gains. Biotech companies received $639 million in venture investments in Q2, up 14% from Q1. These numbers are still well below 2002 levels, but there's a steady upward trend, with four straight quarters of healthy gains in biotech investment.
The category that saw the biggest increase in investment was also biology related: biomedical devices. Investment in these companies increased 54% over Q1, with 52 companies capturing $437 million. Telecommunications investment was also strong, although most telecom investments were to later-stage companies, a less effective indicator of long-term investor confidence. Investment in the semiconductor industry was flat in Q2, and investment in networking companies, a favorite during the Internet-boom years, showed another drop in a long string of investment declines.
So what does all this mean to the science job-seeker? If you're planning a career in industry, tracking the amount and distribution of investment in an industry sector makes sense because it indicates--imperfectly, to be sure--the future strength of the industrial job market in that sector. An even better use for these data, especially for scientists who are nearing the end of their training, is to look at those investments compan-by-company. The MoneyTree survey Web site  allows users to drill down to the level of individual companies; what kinds of companies, or what companies in the geographic area you plan to live in, received an influx of cash recently? You might be able to find your future employer on the list.