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Venture capital funds aren't being terribly adventurous. In the U.S., they invested less capital in start-ups, a sign that uncertainty persists. Also, they're spreading the wealth: More companies are getting a taste, but in smaller doses. This tendency suggests that VC investors are diversifying as a way to test the waters for promising companies.
The situation is pretty straightforward: A difficult economy means that (a) start-ups will have trouble finding customers and (b) exit strategies for investors will be more difficult to attain and probably less lucrative. So, the risks of failure are higher, and the rewards are lower. As a result, VC investors need to be more cautious as they enter positions. Add to this the general financial market malaise we've experienced for the past year and a half -- longer if you trace the origins of the financial crisis to February 2007, with the agita at New Century Mortgage -- and now doesn't exactly seem like the time to place a handful of big, concentrated bets.
The latest report from PricewaterhouseCoopers and the National Venture Capital Association (using data from Thomson Reuters) pegs total investment in start-ups for the fourth quarter of 2009 at $5.02 billion, a decline of 2% from the third quarter. Year-over-year, it represents a plunge of 14%. The report indicates that 794 companies received VC funding, a decline of 13% from the fourth quarter of 2008 ... but an increase of 15% relative to the summer of 2009.
More companies are getting less cash.
This notion is reinforced by the fact that first-round financing fell 5% year-over-year to $1.11 billion. Two hundred-thirty first-time deals were completed, down from 262 in the fourth quarter of 2008, though it was an improvement from the 168 in the third quarter of 2009.
The biotech sector continues to benefit most from the VC business, pulling in $1.01 billion (around 20% of the Q4 investment), though this is off 7% year-over-year. VC investments in the software sector dropped 9% to $959 million from the fourth quarter of 2008, and Internet company investments were basically flat at around $908 million in the fourth quarters of both 2008 and 2009.
Surprisingly, clean technology investments dropped precipitously. In the fourth quarter of 2008, venture capital funds put more than $650 million into clean-tech companies. For the fourth quarter of 2009, that amount fell 58% to a mere $385 million.
For the entirety of 2009, VC investments fell 37% to $17.7 million, its lowest level since 1997. Essentially, VC activity receded to pre-dot-com boom levels. At the peak of the dot-com economy, VC funding was more than five times greater, reaching $100 million in 2000. In 2009, 2,795 VC financing transactions were completed, down from 3,985 the year before.
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