U.S. Venture Investment Lowest in 11 Years, Down 50% to $3.9 Billion in First Quarter

Dow Jones VentureSource: Investment at Lowest Level Since 1998, Deals at a 13-Year Low; VCs Making Choice Investments, Concentrating on Established Companies 


SAN FRANCISCO and NEW YORK, April 18  /PRNewswire/ -- New data from Dow Jones VentureSource shows that the U.S. venture capital industry continued to contract in the first quarter of the year. Venture capitalists invested just $3.90 billion in U.S. companies in the quarter, a 50% decline from the nearly $7.78 billion invested over the same period in 2008 and the lowest quarterly investment total since 1998. Only 477 venture deals were completed in the quarter, well below the 706 deals done in the first quarter last year and the industry's lowest quarterly deal total since 1996.

"We're seeing continued retrenching in the venture capital industry," said Jessica Canning, Director of Global Research for Dow Jones VentureSource. "Over the past several quarters, VCs have pulled back significantly on early stage investments in the U.S., across all industries. During the economic downturn, investors will continue to focus on nurturing their strongest, existing portfolio companies, and keep their eyes open for the next set of opportunities."

IT Industry Walloped: Investment, Deals at 90s Levels

According to VentureSource, the Information Technology (IT) industry saw its lowest level of investment since 1997 with $1.68 billion invested in 231 deals in the first quarter of 2009.  This marks a 52% drop-off from the $3.48 billion that was invested in 370 such deals during the same period last year.  The deal count is the lowest for the IT industry since 1995.

Notably, the software sector saw $728 million invested in 117 deals during the quarter, a 50% decline from the same period last year when nearly $1.46 billion was invested in 163 deals.  This marks the lowest quarterly investment in software since 1997 and the sector's smallest deal count since 1995.

"Technology companies have long been the primary focus of venture capitalists," said Ms. Canning. "But with a non-existent IPO market and corporations paying less for venture-backed technologies, the incentive for investors to back new or unproven business models is just not there."

The information services sector, which includes most of today's Web 2.0 technologies, saw investment and deal flow fall back to the levels seen in 2005.  Information services companies attracted $323 million in 55 deals during the first quarter, down more than 61% from the record $828 million invested in 116 such deals a year ago.

Health Care Sees Smallest Drop

The Health Care industry saw investment and deal flow fall to their lowest levels since 2003.  According to VentureSource data, $1.35 billion was invested in 118 health care deals in the first quarter of the year, a nearly 34% drop from the $2.04 billion in 162 deals during the same period in 2008.

By sector, biopharmaceutical investment slipped 21% from $918 million in 69 deals in the first quarter of 2008 to $723 million put into 56 deals in the most recent quarter.  Medical device companies saw investment fall 51% from the $972 million put into 74 deals last year to $477 million invested in just 42 deals in the most recent quarter.

Even Energy Investment Crashes Back to Earth

The Energy & Utilities industry garnered $189 million in 15 deals during the first quarter, down 59% from the $457 million it saw invested in 24 deals last year.

The renewable energy sector, which makes up the backbone of the industry-spanning "cleantech" category, accounted for the bulk of the industry's investment in the first quarter with $117 million put into nine deals. This represents a 73% decline from the $427 million invested in 16 renewable energy deals in the first quarter of 2008.

Elsewhere, the Business and Financial Services industry attracted $467 million in 69 venture deals during the first quarter, down 50% from the $927 million invested in 94 deals over the same period last year.    The Consumer Services industry saw $144 million put into 26 deals in the first quarter, down 70%.  The smaller Consumer Goods and Industrial Goods & Materials industries both saw investment tallies fall below the $50 million mark to $30 million and $28 million, respectively.

Deal Size Shrinks as More Money Goes to Older Companies

"Not only did venture capitalists back fewer companies in the first quarter but invested less money in the deals they did do deals," said Ms. Canning.  "Much of this capital went to established, older portfolio companies to help them ride out the economic storm."

According to VentureSource, the median deal size fell to just under $2.4 million in the quarter, down 73% from the $9-million median seen a year ago and the smallest quarterly deal size since 2002.

Later-stage financing rounds accounted for 55% of all venture investment in the first quarter of 2009, up from 47% in the same quarter last year.  By comparison, the proportion of seed and first-round investment was just 18% in the first quarter, down from 25% in the same quarter last year. The proportion of second-round investments held steady year-over-year at 23%.  Recapitalizations accounted for 4% of investments in the first quarter of 2009 and 5% in 2008.

Regional Perspectives

California dominated venture capital activity in the first quarter, representing 42% of the nation's deal flow and 47% of the capital invested. By major region, the VentureSource data showed that:

  --  The San Francisco Bay Area attracted the majority of capital, but saw
      investment fall 57% to $1.14 billion with 139 deals complete--the
      region's lowest investment and deal totals in at least a decade.
  --  New England garnered $594 million in 61 deals, nearly 16% less than
      what the region saw invested in the first quarter of 2008.
  --  Southern California saw investment drop 35% year-over-year to $462
      million with 58 deal completed in the first quarter of 2009.
  --  The New York Metro region attracted $390 million in 46 completed
      deals, 40% off from a year ago when $655 million went to start-ups in
      the region.
  --  Investment in Texas came in at nearly $173 million with 23 deals done,
      off more than 52% from a year ago.
  --  It was a similar story in Washington State, where investment dropped
      53% to $115 million in 22 deals.
  --  Investment in the Potomac region fell more than 72% to $104 million
      with only 15 deals completed in the first quarter.

  --  Five venture deals were completed in North Carolina's Research
      Triangle region in the first quarter, accounting for $17 million in
      investment.



For more information, journalists can contact Adam Wade at 415-439-6666 or , or follow the story at http://www.twitter.com/djventurewire.  For general information about VentureSource, visit http://venturecapital.dowjones.com/.

The investment figures included in this release are based on aggregate findings of Dow Jones proprietary U.S. research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice. Copyright (C) 2009

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