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9:39am EDT July 22, 2002

When the technology-heavy NASDAQ took a nosedive earlier this year, everyone thought, “This is it.” The day of reckoning for the high-flying Internet stocks had finally arrived.

Companies lost millions in valuation in just a few days, and some investors saw their double-digit gains vanish. But what was originally seen as a free fall ended up being analogous to an airplane ride: It wasn’t really falling, it was just that sense of weightlessness as the plane goes from a steep climb to a gentler ascent.

The flow of money has slowed, but not stopped. The torrid pace had to decrease some time.

Venture Economics reported that even before the decline in the NASDAQ, the growth in venture financing had slowed. While the total amount of venture financing was at an all-time high at more than $22.5 billion, it was less than an 8 percent increase from the fourth quarter of 1999. For comparison, the gains in the previous quarters were 61 percent, 23 percent and 72 percent.

The Industry Standard reported that the direction of the money has also changed. Money invested in e-commerce dropped 46 percent to $744 million from about $1.4 billion in the fourth quarter of 1999. The amount invested in infrastructure increased 83 percent over the same period, to $1.7 billion from $952 million.

As the money slows, investors will be more selective. An innovative idea alone simply won’t be enough to garner millions in venture capital. While the market may be cooling, spelling an end to the 146 percent one-year return for venture capitalists in 1999, investors are still expecting more historic levels of return — 20 percent.

And there is still plenty of money to be had. An estimated $15 billion remains to be invested from what was raised last year.

“As long as there is cash in the market, the venture capital won’t dry up,” says Jaime Punishill, senior analyst with Forrester Research. “The nation is flush with wealth. Businesses will be able to get funding. There is a massive supply directly related to this mass of wealth.”

As the Internet business concept matures, venture capitalists have a much better idea of what is a viable business plan and what isn’t.

And if every Internet-based business went bankrupt tomorrow, the average person might not see any other effects. Most of them have no operating margin and are posting huge losses. Banks wouldn’t touch them.

“They are all using venture capital money or private capital,” says Punishill. “Most of these guys can’t even qualify for a line of credit. Wall Street may have gotten tepid to dot-coms; venture capitalists have not.” Todd Shryock (tshryock@sbnnet.com) is SBN’s special reports editor.