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US venture investment falls from 2007 high to USD6.64bn in second quarter, says Dow Jones

Venture capital investment in US companies slipped below the USD7bn mark for the first time in 18 months in the second quarter, according to the latest Quarterly US Venture Capital Report

Venture capital investment in US companies slipped below the USD7bn mark for the first time in 18 months in the second quarter, according to the latest Quarterly US Venture Capital Report from Dow Jones VentureSource.

Investment fell 12 per cent in the second quarter compared with the same period of 2007 with USD6.64bn put into 602 deals, the lowest quarterly deal count since 2005. The USD7.58bn invested in the second quarter of 2007 was the second highest quarterly totals recorded since the end of the dot-com boom in 2001.

‘While the US investment total is down compared with last year’s impressive second quarter, we still saw steady deal activity and investment in the first half of the year, which is encouraging,’ says Jessica Canning, director of global research for Dow Jones VentureSource.

‘Venture capitalists commonly take the long view when it comes to investing. While IPOs and acquisitions may be rare now, VCs aren’t consumed about that. They’re focusing on what’s next – and that’s reflected in the healthy early-stage investment we’re seeing in areas like renewable energy, information services and business support services.’

According to the report, the information technology industry saw deal flow drop 27 per cent from 390 deals in the second quarter last year to 286 in the latest quarter-the lowest deal count since the first quarter of 1997. Investment was down 26 per cent from nearly USD3.50bn to USD2.60bn, the lowest quarterly total since 2003.

The information services sector, which includes the majority of today’s ‘Web 2.0’ companies, was the only area within IT to see positive gains, with USD688m invested in 80 deals, up 20 per cent from the USD572m invested in 94 deals during the same period last year.

Health care companies also fared poorly in the second quarter with the industry only seeing 149 deals completed and USD1.98bn invested – 22 per cent less than the USD2.53bn that was invested in 181 health care deals in the second quarter of 2007.

‘The health care industry is the most concerning at the moment, as investment is down 31 per cent compared with the first six months of last year and deal flow is at its lowest level in three years,’ Canning says.

‘Considering the amount of time and capital it takes VCs to build a successful life science company, there may be a hesitation to continue investing in these companies given our current IPO market conditions.’

The data showed that the majority of the health care industry’s investment decline in the second quarter was in the medical devices sector, which saw just 60 deals completed and USD798m invested, a 25 per cent drop-off from the USD1.06bn invested in 72 deals in the same period of 2007.

However, the energy and utilities industry posted a record quarter with USD817m invested in 32 deals, up 160 per cent over the USD314m put into 23 deals in the second quarter of 2007. Most notably, there was a big surge in renewable energy investments as the sector saw USD650m put into 26 deals, records on both accounts.

‘The movement of venture dollars from the traditional areas of information technology and health care toward burgeoning sectors like renewable energy, power management, and agriculture, proves that venture capitalists are making good on their promise to tap opportunities in the massive energy market,’ Canning says.

The top three venture capital deals in the second quarter all belonged to solar energy companies, led by SunEdison of Beltsville, Maryland, which raised USD131m (as well as an additional USD30m in separate debt financing) in its second round. eSolar of Pasedena, California, garnered USD130m and BrightSource Energy of Oakland raised USD115m.

Compared with the second quarter of 2007, the smaller business and financial services (up 6 per cent to USD771m) and industrial goods and materials industries (up 14 per cent to USD150m) both posted modest gains while the consumer goods industry saw investment drop 24 per cent to USD121m.

The report also confirmed that later-stage deals continue to attract the lion’s share of venture capital with USD3.48bn, about 54 per cent of the investment total, in 225 rounds. This pushed the median deal size of a later-stage round to a record USD12m in the first six months of 2008.

Nevertheless, the number of first rounds ticked up from 200 rounds completed in the first three months of the year to 207 from April to June, while the later-stage deal count saw a corresponding dip.

‘The most encouraging part of this quarter’s report is that early stage investing is holding relatively steady thus far in 2008,’ Canning says. ‘It may be harder for entrepreneurial companies to raise venture capital these days but it’s by no means impossible.

‘Continued early stage deal flow is a good sign that the venture industry is prepared to weather the economic downturn and will continue to back the next wave of disruptive technologies.’

The median deal size of a first round was USD5m in the first half of 2008, an annual figure that has remained unchanged since 2004.

The overall median size of a venture capital deal in the US, including all stages of development, climbed to USD7.5m in the first half of 2008, the highest total on record.

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