Playing Favorites Just what type of company is the apple of a venture capitalist's eye?

While economic atrophy has given pause to risk-loving venturecapitalists, software remains a soft spot for many investors.Venture funding slumped to its lowest level in four years in thethird quarter of 2002; still, software companies enjoyed a 28percent boost compared to the same period a year ago. That increaseamounted to $1.2 billion in venture capital for the sector,according to consulting firm Ernst & Young and research firmVentureOne. Altogether, software companies accounted for 35 percentof venture capital in the quarter.

"Software companies are easier to fund because theydon't have a lot of inventory risk," says John Copeland,founder, chair and chief scientist of Lancope, a networksecurity firm in Atlanta. His company received $5.5 million in VCfunding last April. Having a solid sales record helps, too,Copeland says: "Our funder wanted a product that was proven inthe marketplace, [not] just a company with a great idea."

Anne Mitchell sees another advantage. "For softwarecompanies, it's easy to be light on your feet," saysMitchell, founder, president and CEO of Habeas Inc., an anti-spamsoftware firm in Palo Alto, California. "If something [mustbe] changed, it can be implemented in 24 hours." Venturecapital helped launch Habeas last August.

The Ernst & Young study also found that when venturecapitalists fund, they are investing at higher amounts. "Thebetter companies are being funded," says Bryan Pearce, VCadvisory group leader at Ernst & Young in Boston. "Andthey're getting more than they have in the past."

As investors look for more stable opportunities, franchisecompanies in service sectors such as food are also getting a closerlook. This interest has been long in coming, says Don DeBolt,president of the International Franchise Association:"It's taken the financial community a while to understanda successful company isn't always built on hardassets."