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US venture investment reaches USD5.27bn in quarter two

After a sizable decline in the first quarter of 2009, the US venture capital industry showed signs of recovery in the second quarter as venture capitalists invested USD5.27bn in 595 dea

After a sizable decline in the first quarter of 2009, the US venture capital industry showed signs of recovery in the second quarter as venture capitalists invested USD5.27bn in 595 deals, according to data from Dow Jones VentureSource.

While still dramatically lower than the USD8.33bn put into 726 deals during the second quarter of last year, this marks a 32 per cent improvement over the first quarter of 2009, which saw the lowest quarterly investment since 1998 with USD4.00bn invested.

"As the venture capital industry’s rebound gains traction, we’re seeing a new landscape emerge," says Jessica Canning, director of global research for Dow Jones VentureSource. "Investors are diversifying their portfolios away from traditional investment areas like biopharmaceuticals and software toward segments like medical devices and information services while also pulling back on how much they are willing to invest in each deal."

According to VentureSource, the healthcare industry saw USD2.23bn invested in 184 deals completed in the second quarter of 2009, a 14 per cent decline from a year ago when USD2.60bn was put into the same number of deals. This marks the first time on record that healthcare investment outpaced investment in IT, which attracted USD1.88bn in the second quarter.

"Healthcare investment was the only sector to spring back to levels seen before the economic meltdown that began in the third quarter of 2008," says Canning. "The recovery in the biopharmaceutical and medical device sectors is driving the rebound in overall venture investments this quarter."

By sector, biopharmaceutical investment slipped 14 per cent from USD1.42bn in 85 deals in the second quarter of 2008 to USD1.22bn put into 71 deals in the most recent quarter. Investment in medical device companies fell 26 per cent from the USD1.04bn put into 77 deals last year to USD766m invested in 79 deals in the most recent quarter. These declines were offset somewhat by a strong quarter in the healthcare services sector, in which investment nearly tripled from a year ago to USD145m.

For the second consecutive quarter, investment in the IT industry remained at lows unseen since before the tech boom of the late nineties. The USD1.88bn invested in the second quarter of 2009 is a small improvement over the first quarter but still on par with levels seen in 1997. The 248 IT deals are on par with 1995 though, again, slightly better than the first quarter of this year. In comparison, the second quarter of 2008 saw USD3.21bn invested in 338 IT deals.

"For the past six years, software investment has averaged just under USD1.5bn each quarter but that figure has been cut in half in the first two quarters of this year," says Canning.

According to VentureSource, the US software sector saw USD696m invested in 115 deals during the second quarter, a 52 per cent decline from the USD1.42bn invested in 171 deals during the same period last year and the sector’s lowest quarterly investment total since 1997 and smallest deal count since 1995.

The information services sector, which includes most of today’s Web 2.0 companies, saw investment of USD572m in 69 deals during the second quarter, down 29 per cent from USD800m invested in 94 deals a year ago.

The energy and utilities industry garnered USD317m in 29 deals during the second quarter, down 70 per cent from the USD1.07bn it saw invested in 37 deals last year. Investment in the renewable energy sector, which makes up the backbone of the industry-spanning cleantech category, fell substantially with just USD221m invested in 16 deals in the quarter, a 75 per cent decline from the USD897m invested in 30 similar deals in the same quarter last year.

Elsewhere, the business and financial services industry attracted USD547m in 69 venture deals during the recent quarter, down 38 per cent from the USD881m invested in 93 deals last year. The consumer services industry saw USD80m put into 22 deals in the second quarter, down 65 per cent compared to a year ago. The consumer goods industry attracted USD96m in venture capital while the industrial goods and materials industry garnered USD86m.

Corporations may not be making many large acquisitions these days but they returned to venture investing in a big way in the second quarter of 2009.

"As venture investors are forced to hold on to companies for longer periods of time, corporations are beginning to step in to help carry these companies down the last stretch to exits," adds Canning.

According to VentureSource, the second quarter saw venture-backed companies raise ten corporate rounds and garner USD401m in financing, the most since 2000. Even excluding the USD200m round raised by social network Facebook – the largest investment round of the quarter – the remaining USD201m still marks the most capital raised by venture-backed companies from corporations since 2003.

The data shows that the median deal size fell to USD5m in the second quarter, down from the USD8m median seen a year ago and the lowest median deal size since 1999.

Later-stage financing rounds accounted for 53 per cent of all venture investment in the second quarter of 2009, up from 51 per cent in the same quarter last year. The proportion of seed and first-round investment was 19 per cent, down from 21 per cent in the second quarter last year. The proportion of investment going to second rounds rose to 25 per cent in the most recent quarter from 23 per cent last year. Recapitalizations accounted for roughly three per cent of investments in the second quarter of 2009, down from five per cent in 2008.

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