Reality Check What happened with venture capital in the first quarter of 2004?

Venture capital stayed on course in the first quarter of 2004,according to the MoneyTree Survey. Investments reached $4.6billion, comfortably in the mid-range of the levels seen in thepast year and a half. And a total of 126 companies in the startupand early stages of development received their first round ofventure capital-just about the average number over the previousfour quarters.

That kind of stability doesn't mean it's any easier forfirst-timers. As the chart below shows, the number offormative-stage companies attracting venture capital for the firsttime is at a nine-year low despite anecdotal industry buzz of aresurgence. Further, they account for a smaller percentage of allcompanies getting venture backing. In part, this is due to theextraordinarily large number of companies that were initiallyfunded in 1999 and 2000. As these companies have grown towardmaturity, they have required additional rounds of funding and moreof the venture capitalists' time, leaving fewer resourcesdevoted to exploring new deals.

On the other hand, the fact is that the rules have changed,probably permanently. A more disciplined, methodical approach hasbeen reinstituted. Handshakes over ideas scrawled on cocktailnapkins have been replaced by full-blown business plans, protracteddue diligence and third-party validation before the first dollar ofventure capital becomes operating capital. Most venture capitalistsand some entrepreneurs consider this a positive shift. Companiesthat emerge from this process are likely to be stronger and moresuccessful over the long term. And after all, creating sustainablesuccess is what starting a business should be all about.

Kirk Walden is the national director of venture capitalresearch for PricewaterhouseCoopers.