As the economy weakened during the third quarter, venture capitalists continued to rein in investments in US-based companies, according to the Quarterly U.S.
As the economy weakened during the third quarter, venture capitalists continued to rein in investments in US-based companies, according to the Quarterly U.S. Venture Capital Report from Dow Jones VentureSource.
The third quarter saw USD7.37bn in venture capital invested in 583 deals, 7 per cent less than the USD7.94bn put into 673 deals during the same period of 2007 and the second consecutive quarter of year-on-year decline.
‘Clearly the economic crisis is already impacting the venture industry, which has traditionally been relatively insulated from fluctuations in the broader economy,’ says Jessica Canning, director of global research for Dow Jones VentureSource.
‘With the IPO market likely to be shut down for some time, venture capitalists are pulling back on investments in technology companies as well as in areas like business and financial services and media, content and information that are likely to suffer from a decline in advertising and enterprise spending. At the same time, VCs are allocating more resources to energy deals, which stand to benefit from a shift in federal and state energy policies.’
Investments in the energy and utilities industry reached a record USD1.18bn in 32 deals during the third quarter, up 90 per cent from USD620m invested in 35 deals in the same period of 2007. Eighteen deals in the renewable energy category accounted for a record USD1.08bn in investment, with most of the capital going to solar companies.
‘While there are a relatively small number of deals being done for solar power and other renewable energy companies compared with traditional VC areas like software and IT, they’re attracting huge amounts of capital, and that’s to be expected,’ Canning says. In one of the top third-quarter deals, SolarReserve of Santa Monica, California raised USD140m in its second round.
The information technology industry saw deal flow fall to its lowest point in more than a decade, dropping 21 per cent from 342 deals in the third quarter last year to 270. Total IT investments also dropped 21 per cent, from USD3.44bn to USD2.73bn. Software accounted for the bulk of investment with USD1.15bn invested in 125 deals, down 13 per cent from USD1.32bn invested in 149 deals in the third quarter of last year.
For the first time in nearly three years, the information services sector – including so-called Web 2.0 companies, most of which rely on advertising revenue – saw a decline in interest from venture capitalists with USD501m put into 64 deals, 11 per cent less than the USD561 put into 83 deals a year earlier.
The consumer services industry also saw investment fall 47 per cent from USD286m to USD151m, while deal count fell from 32 to 20. The travel and leisure sector (down 79 per cent to USD28m) accounted for most of the decline.
After two consecutive down quarters, investment in the health care industry was virtually flat, with investment down 2 per cent to USD2.16bn in 152 deals. The biopharmaceuticals sector saw investment grow 4 per cent from USD1.13bn in the third quarter of 2007 to USD1.17bn, with the deal count stable at 70. Medical device firms posted a third consecutive down quarter as investment fell 17 per cent from USD876m to USD727m while the deal count held steady at 55.
The business and financial services industry saw investment drop 26 per cent from some USD1bn in the third quarter of 2007 to USD740m as the financial institutions and services sector was hit by the economic crisis.
The consumer goods industry posted its best quarter on record with investment soaring 223 per cent, from USD67m to USD223m, on the back of larger cleantech-related deals in the vehicles and parts sector.
Many venture capitalists are choosing to focus on established portfolio companies, the report says. Second and later-stage rounds dominated investment with USD5.89bn, 82 per cent of the quarterly total, in 368 rounds, a share up from 77 per cent of capital investment in the third quarter of 2007.
Second rounds saw the largest gain with 150 deals and USD1.88bn, the highest total for such deals in two years. By contrast, investments in seed and first round financing dipped to USD1.30bn invested in 203 rounds, the lowest for two years. The overall median size of US venture capital deals, including all stages of development, held steady with 2007 at USD7.5m.
California dominated venture capital activity in the third quarter, accounting for 45 per cent of US deal flow with 261 deals and nearly 56 per cent of capital invested with USD4.10bn. The San Francisco Bay Area saw a 22 per cent jump in venture investment with USD3.17bn (the highest total since the first quarter of 2001) invested in 195 deals, with much of the growth driven by record investment in health care and energy.
Despite seeing investment drop nearly 10 per cent to USD867m in 56 deals, its lowest deal count since 2005, Southern California was the second most popular region for venture investment ahead of New England, where investment fell 23 per cent to USD769m in 78 deals.
The New York region attracted USD559m in 49 deals, 14 per cent down from USD647m in 2007, while the Potomac region saw investment fall 27 per cent to USD264m in 21 deal. Investment in Washington state dipped 10 per cent to USD210m in 18 deals; investment in fell for the second quarter in a row, down 73 per cent to USD119m in 16 deals; and investment in North Carolina’s Research Triangle region jumped 124 per cent from USD33m in the third quarter of 2007 to USD74m in 10 deals.
