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US venture capital recovery stalls as 3Q investment slumps

Following an uptick in the second quarter, investments in US venture-backed companies have stalled in the third quarter, putting 2009 on track to be the worst investment year since 2003, according to new data from industry tracker Dow Jones VentureSource.

Venture capitalists invested USD5.1 billion in 616 deals in the third quarter of 2009, down 6% from the USD5.4 billion put into 595 deals during the second quarter of this year.

This quarter’s total is down 38% from the USD8.2 billion invested in 663 deals during the third quarter of 2008.

"The slow recovery we’ve seen for venture capital has faltered," said Jessica Canning, director of global research for Dow Jones VentureSource. "As liquidity and fundraising lag after the economic meltdown in 2008, investors have no choice but to keep a tight rein on investments until the industry is on more solid ground."

Scott Austin, editor of Dow Jones VentureWire said: "The current investment pace will likely persist right through 2010, as long as limited partners — the pension funds, university endowments and other suppliers of capital to venture firms — continue to scale back their commitment levels to venture funds. With fewer dollars to put to work, venture firms will only invest in the most promising and capital-efficient companies going forward."

Information Technology (IT) is back on top after Health Care outpaced the sector for the first time on record in the second quarter of 2009. IT companies raised USD1.9 billion in 270 deals during the third quarter of 2009 while Health Care saw USD1.7 billion invested in 184 deals.

"For the first time, Web 2.0 investments surpassed the software sector," said Canning. "Although the IT recovery has been sluggish, this quarter’s investments in the Web-heavy information services sector are nearly

According to VentureSource, the US software sector saw USD581 million invested in 106 deals during the third quarter, a 55% decline from the USD1.3 billion invested in 143 deals during the same period last year. This is the sector’s lowest quarterly investment total since 1996.

The information services sector, which includes most of today’s Web 2.0 companies, saw investment of USD627 million in 86 deals, a 11% increase from the USD567 million invested in 74 deals in the third quarter of 2008.

While Health Care came in a close second to IT, investment in the industry is down 25% over the same period last year.

"Surprisingly, health care investment dropped significantly this quarter," said Canning. "After several years of growth, 2009 could end with the lowest amount invested in this space since 2000."

The number of biopharmaceutical deals rose, but investment dropped 32% from last year. In the third quarter, investment in biopharmaceutical companies totaled USD811 million across 83 deals, down from USD1.2 billion raised through 73 deals last year.

Investments in the medical devices sector were close behind. In the most recent quarter, venture capitalists invested USD774 million in 77 deals, down 3% from USD796 million raised in 63 deals in the third quarter last year.

The Energy & Utilities industry raised just USD415 million in 23 deals during the third quarter, down 70% from the USD1.4 billion invested in 34 deals during the same period last year. Investments in the third quarter were up over the previous quarter, which saw USD310 million invested in 27 deals in the sector.

Investment in the renewable energy sector fell substantially as 14 deals raised USD343 million, 73% less than the USD1.3 billion invested in 23 deals during the same quarter last year.

Elsewhere, the Business and Financial Services industry attracted USD560 million in 81 deals, down 32% from the USD821 million invested in 91 deals during the third quarter last year. The Consumer Goods industry had a strong quarter with USD207 million put into 14 deals, a slight increase from the USD202 million invested in 15 deals last year. The Consumer Services industry saw USD125 million invested in 20 deals, a 35% drop from the USD192 million put into 24 deals last year. The Industrial Goods & Materials industry garnered USD169 million in 17 deals, a 27% decrease from the USD231 million put to work in 25 deals last year.

Corporations may be making fewer acquisitions, but they’re stepping up their investing. During the third quarter, venture-backed companies raised 11 corporate rounds garnering USD178 million, a 16% increase over the USD153 million raised in the same number of rounds last year. This brings the year-to-date total to USD650 million, well above the USD541 million raised in 2008.

In the most recent quarter, later stage companies accounted for 40% of deals while first-round deals accounted for 27% of the total deal count. During the same period last year, later stage companies accounted for 33% of deals while first-round deals accounted for 35% of the total deal count.

By investment, later stage deals garnered 59% of venture dollars in the third quarter of 2009, up from 52% last year. The proportion of the quarter’s investment total going to seed and first rounds was 16%, down from 18% last year. The proportion going to second rounds dropped to 22% from 27%. Recapitalizations accounted for roughly 3% of investments in the third quarter of 2009, on par with last year.

The data also shows that median deal size fell to USD5 million in the third quarter from the USD7 million median seen a year ago. The USD5 million median is consistent with the previous two quarters and is the lowest median deal size since 1999.

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