By Ronald Rosenberg, Globe Staff, August 15, 1999

New England Venture Capital Report 2d Quarter, 1999 Fast pace of deals has some worried Hub Net firm snares $70 million For some start-ups, not a rosy quarter THE CHARTS Biotechnology Business Services Communications Computers Consumer Distribution Electronics Healthcare Industrial Medical Pharmaceuticals Semiconductors Software

Venture capitalists shoveled a record-setting $1.055 billion into 128 new England companies in the second quarter, including $70 million into Boston-based JuniorNet, which wants to be a more robust but commercial-free version of America Online for children.

``I was looking for $15 million to $20 million, but had offers of $130 million, so $70 million is a compromise,'' said Alan Rothenberg, JuniorNet's founder and chief executive. ``I never dreamed I would need so much money, either. In fact, we are now looking for another $50 million.''

Gone are the days when would-be entrepreneurs had to pound the pavement to scrape together enough venture capital to get their Internet companies off the ground. Today, with scores of Internet start-ups touting marketable products and services, venture capitalists are stumbling over one another to be the first to write the checks.

According to the latest Boston Globe/PricewaterhouseCoopers Money Tree Venture Capital survey, of the 10 companies that received the most venture capital in the April-to-June quarter, seven were Internet related. Following JuniorNet was $51 million raised by Family Education Network of Boston, which offers on-line educational services for kindergarten through 12th grade, and in public and private schools.

Overall, 56.4 percent of the more than $1 billion invested regionally went to Internet-related businesses, such as electronic commerce companies selling everything from home furnishings to vitamins to travel reservation services.

There were also business-to-business deals, such as eDOCs of Westborough, which offers Internet companies a way to present and collect payments from customers. Several on-line training companies and investment service firms raised capital, including Raging Bull of Andover, which was formed by two recent college graduates. Plus there were substantial investments in telecommunications and other technology sectors.

``We are doing two projects per month and seeing 20 interesting things that could be done with a high probability of success,'' said Ted R. Dintersmith, general manager at Charles River Ventures in Waltham. ``We've stopped doing life science investments partly because of the opportunities and challenges of the Internet and telecommunications startups.''

The $1.055 billion -- the second highest amount raised among regions behind Silicon Valley -- was nearly triple the $379.5 million invested in the second quarter of 1998. Indeed, every other region, except greater Philadelphia and Texas, saw significant increases in venture capital spending.

Nationwide, venture-backed investments in the second quarter reached a record $7.67 billion, a 104 percent increase over the $3.77 billion raised in the same quarter last year. Those dollars also flowed into 30 percent more companies: 992 firms nationwide compared to 763 businesses a year earlier. Average funding per company also soared, up 57 percent to $7.4 million, versus $4.9 million a year ago. Nationwide investment in Internet-related companies for the quarter was more than was raised in all of 1998.

Another barometer of the health of venture-backed companies nationwide is the amount that goes to early-stage financing. For the second quarter, companies in start-up and early stages of development captured $3.12 billion, or 41 percent, of the total invested nationally. Companies in the expansion stage accounted for $2.7 million, or 35 percent of the total.

And beyond New England and Silicon Valley, the Internet gold rush fueled growth nationwide, as $3.8 billion went into 412 Internet-related firms, compared with $947 million in 174 such firms in the 1998 quarter.

``We expected investments to grow, but the magnitude of the increase is absolutely stunning,'' said Patrick M. Gray, a partner in PricewaterhouseCooper's Global Technology Industry Group in Boston. ``Technology in general, and the Internet in particular, are responsible for the leap. All the stars were aligned in the second quater: a solid economy, a favorable initial public offering market, and a strong stock market.''

In New England, Internet-based firms dominated many of the company categories, including software and information services, telecommunications, computer products, consumer, business services, and retail. The biggest investments, such as in JuniorNet -- which raised the single largest amount in the five-year history of the PricewaterhouseCoopers venture capital survey -- went to companies selling products and services to consumers.

JuniorNet's $70 million comes largely from RCN Corp. of Princeton, N.J., which invested $47 million in the second-round financing for a 43 percent stake in the company. Three venture firms -- Euclid Partners, Boston Capital Ventures, and New World Ventures -- put up the additional $23 million.

RCN's president, David McCourt, said he invested after his 8-year-old son spent six hours using JuniorNet ``before he had to be dragged away from it twice.'' RCN is one of the largest Internet service providers in the Northeast.

Unlike many advertising-supported ``.com'' sites, JuniorNet is a $9.95-per-month subscription service that combines a CD-ROM and an on-line connection enabling kids age 3 and older to get access to materials from publishers of children's magazines. Since JuniorNet was launched in April, Rothenberg, who declined to reveal subscriber figures, said 30,000 families have requested information about the service, which also limits children from gaining full Internet access.

``My original business plans called for $11 million in financing, but to be a leader in the field we had to sign up more partners for content. Plus, we bought a developer of children's programming and we are growing faster than I expected,'' said Rothenberg, who expects JuniorNet to spend more than $30 million in advertising and promotion to create brand awareness starting this fall.

Internet companies catering to a wider audience also attracted large sums, such as MotherNature.com, a Concord-based on-line marketer of natural vitamins, minerals, and herbal supplements that raised $42 million from a dozen venture capital firms in a third-round financing. It is spending $25 million for a national advertising campaign.

``This is a Darwinian business,'' Michael Barach, the president of MotherNature.com, said in a recent interview. ``There are only going to be a few electronic winners in each category. Everyone else will die or merge.''

Similarly, John Carson, president of Family Education Network, learned that to be a major player in a large category, such as on-line K-12 education, would require about $100 million of private financing, before turning to Wall Street and an initial public offering.

So far, the company has raised $71 million from a mix of venture firms and such strategic partners as America Online; Intel Corp.; Jostens Inc., the Minneapolis provider of class rings; and Harcourt General Inc., publisher of educational and careeer training materials.

Like a television network supplying programming and other services to its affiliated stations around the country, FamilyEducation.com provides school systems in its network with a mix of news, information, and educational trends and activities. Aiming to be an on-line education community of teachers, parents, and students, the company hopes to reach a wide audience through its AOL and Harcourt General investors, Carson said.

``Raising a lot of money sends a message to the venture community about what it will take to back a competitor, plus it protects us in a down IPO market,'' said Carson, whose 130-employee company has signed up 870 school systems with 7,000 schools, including 30 systems in Massachusetts.

And while most of New England's Internet- and technology-related investments were in Massachusetts companies, 10 in Connecticut, from a fledgling airline shuttle firm to a provider of telecommunications services, captured nearly $120 million, or 11.4 percent of the more than $1 billion invested in New England.

Overall, the Bay State accounted for 85 percent of all venture capital stakes in the region. The investments, dominated by deals in communications, software and information services, and consumer products. And while investments in health care and medical device companies continue to rise, venture funding in such categories as pharmaceuticals and biotechnology have plateaued or decreased during the last three quarters.

``The Internet is driving the big venture capital investment, but when you look at the diversity of the region in telecommunications, software, health care, and financial services, New England not only holds its own, but it continues to prosper,'' said Michael Frank, a partner at Waltham's Advanced Technology Ventures.

Indeed, funding throughout the nation was so strong that 15 venture capital companies each invested $15 million or more in the second quarter, according to PricewaterhouseCoopers, which surveyed 684 venture capital firms in late June and received 505 responses for a 66.5 percent return rate.