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US venture capital investment finishes 2009 with flurry of deals

An overall bad year for the US venture capital industry ended on a high note as deal activity increased in the fourth quarter of 2009.

Venture investors put USD6.3bn to work in 743 deals in the most recent quarter, up slightly from the USD6.1bn invested in 619 deals during the same period in 2008, according to statistics released by Dow Jones VentureSource.

In total, 2009 saw 2,489 deals completed and USD21.4bn in venture capital invested in US companies, a 31 per cent drop from 2008 when USD31bn was invested in 2,817 deals.

“Venture capitalists are still treading lightly when making investments,” says Jessica Canning, global research director for Dow Jones VentureSource. “In the fourth quarter, venture deal activity returned to levels seen before the collapse of the financial markets, but capital invested continued to lag as investors gave companies just what they need to reach the next milestone.”

In 2009, the healthcare industry collected more of venture capitalists’ dollars than the information technology industry making it the first year on record that IT was not the venture industry’s leading investment sector, according to VentureSource.

Healthcare garnered USD7.7bn which was put into 701 deals in 2009, a 14 per cent drop from the previous year. In the fourth quarter, healthcare companies raised USD2.1bn in 207 deals, a 15 per cent increase from the same period last year.

In IT, venture capitalists put USD6.1bn into 817 deals in 2009, a 35 per cent drop from 2008 and the industry’s weakest year since 1996. In the fourth quarter, USD2bn was put into 250 IT deals, up 11 per cent from the same period last year.

Biopharmaceuticals companies remained the biggest draw in the healthcare industry as investors put USD4.2bn into 302 deals, an 11 per cent drop from the previous year. Medical devices, a sector that has seen increased interest from investors during the latter part of the decade, collected USD2.9bn for 291 deals, down 18 per cent from the previous year.

Within IT, software companies continued to take the largest chunk of investment as they have done since 2001. Investors put USD2.9bn into 487 software deals in 2009, a 43 per cent drop from the previous year. The communications and networking segment was not hit as hard, ending the year with USD1.5bn invested in 123 deals, off 11 per cent from the previous year.

The energy and utilities sector experienced a quick correction after a record-breaking 2008. According to VentureSource, US companies developing technologies for utilities as well as renewable and non-renewable energy raised USD1.2bn in 87 deals in 2009, just one third of the USD3.7bn raised in 118 deals in 2008. In the fourth quarter, energy and utilities companies garnered USD269m in 31 deals, a 67 per cent drop from the same period last year.

“Venture capitalists’ shift away from capital intense deals, such as funding large energy projects, toward capital efficient deals, like energy efficiency plays, contributed to the steep decline in venture investments in the energy and utilities industry,” says Canning.

Elsewhere, investments in the business and financial services industry slipped 22 per cent to USD2.8bn which was put to work in 371 deals. The consumer services industry had a strong fourth quarter, raising USD828m and ended the year having collected USD2.4bn in 365 deals, a 37 per cent drop from 2008. The smaller consumer goods industry finished the year on par with 2008 as USD667m was put into 52 deals.

Overall, the median round size in 2009 was USD4.7m, down from USD6mi seen in 2008, according to VentureSource. Later-stage deals accounted for the largest slice of deal activity with 944 deals, or roughly 39 per cent of the total US deal count for the year, attracting USD11.4bn in investment. Meanwhile, seed- and first-rounds accounted for 803 deals and raised USD3.7bn.

“After years of a balanced portfolio, investors made a startling retreat from early-stage companies in 2009,” says Canning. “As the exit markets open up and older companies are acquired or go public, it is likely younger start-ups will begin to see more deals and dollars.”

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