Benchmarks: Q3 2003 Venture capital investments.(Mergers, IPOs, and venture Finance: Benchmarks)

More bad news on the venture capital front: For the first time in seven years, software has dropped to second place in total venture dollars invested. According to the PricewaterhouseCoopers MoneyTree Survey, the new hot sector, up 31% from Q2 and up 88% from a year ago, is now biotechnology, which captured $873 million in new investment compared to software's $819 million. Meanwhile, total investment in software companies has dropped by 11% from last quarter.

Arguably, the MoneyTree Survey categories can be ambiguous. Software represents the core technology for many of the companies that are classified as part of the Survey's networking, computer, and IT categories. And software still wins in terms of total deal count during the quarter: 160 software companies found VC funding compared to only 86 biotech and 54 medical devices and equipment firms.

But the long-term trend is still troubling. Even though there's been a (very) modest uptick in venture funding this year, fewer software companies are getting funded, the valuations are lower, and average deal size remains small--only $5.12 million per company for software, well below the MoneyTree Survey's overall average deal size of $6.32 million and about half of biotech's average of $10.2 million.

And it isn't just the money that may be drying up. Right now, almost any technology-oriented venture firm has some basic experience with software deals. If enough venture firms shift their attention away from software, however, company founders are going to have a harder time finding knowledgeable investors. One of the toughest challenges for startups in niches like retailing and healthcare is that only a handful of venture firms know these markets. If enough VCs abandon the software business, entrepreneurs may find a similar shortage of investors with meaningful experience.

 Falling Behind  Software no longer captures the biggest share of venture capital investment dollars. The new winner by a nose: Biotechnology.  Biotechnology                  20.71% Software                       19.43% Telecommunications             11.66% Medical Devices & Equipment     8.91% Networking & Equipment          7.85% Media & Entertainment           5.01% Semiconductors                  4.09% Computers & Peripherals         4.03% IT Services                     4.00% Industrial / Energy             3.79% Consumer Products & Svcs.       3.27% Business Products & Svcs.       2.88% Electronics & Instrumentation   2.34% Healthcare Services             1.15% Retailing/Distribution          0.50% Financial Services              0.35% Other                           0.01%  Source: PWC MoneyTree Survey  Note: Table made from bar graph.