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As the economy weakened during the third quarter, venture capitalists continued to rein in investments in U.S.-based companies, according to the Quarterly U.S. Venture Capital Report from Dow Jones VentureSource (http://www.venturecapital.dowjones.com). The third quarter of 2008 saw $7.37 billion in venture capital invested into 583 deals, 7% less than the $7.94 billion put into 673 deals during the same period last year and the second consecutive quarter of year-over-year declines.
"Clearly, the current economic crisis is already impacting the venture industry, which has traditionally been relatively insulated from fluctuations in the broader economy," said 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."
Renewable Energy Investment Breaks $1B Mark for First Time
Most notably, the data showed that investments in the energy and utilities industry reached a record $1.18 billion in 32 deals during the third quarter of 2008, up 90% over the $620 million invested in 35 deals during the same quarter last year. Specifically, 18 deals in the renewable energy category accounted for a record $1.08 billion in investment with the majority of that 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 to traditional VC areas like software and IT, they're attracting huge amounts of capital and that's to be expected," said Ms. Canning.
One of the top venture deals in the third quarter belonged to a solar company, SolarReserve of Santa Monica, Calif., which raised $140 million in its second round.
IT, Web Companies Suffer; Health Care Flat
The data shows that the information technology (IT) industry saw deal flow fall to its lowest point in more than a decade, dropping 21% from 342 deals in the third quarter last year to 270 in the most recent quarter. Likewise, IT investments dropped 21% from $3.44 billion to $2.73 billion year-over-year. Software accounted for the bulk of investment with $1.15 billion invested in 125 deals, down 13% from the $1.32 billion put to work in 149 similar deals during the same period last year.
For the first time in nearly three years, the information services sector saw a decline in interest from venture capitalists with $501 million put into 64 deals, 11% less than the $561 put into 83 similar deals during the third quarter of 2007. Information services include many of today's "Web 2.0" companies, most of which rely on advertising as a source of revenue.
The Web-heavy consumer services industry also saw investment pull back, declining 47% from $286 million to $151 million in the most recent quarter while deal count fell from 32 to 20. The travel and leisure sector (down 79% to $28 million) accounted for most of the decline.
After two consecutive down quarters, the health care industry rebounded to post a virtually flat quarter with investment down 2% to $2.16 billion in 152 deals during the third quarter of this year. The biopharmaceuticals sector saw investment tick up 4% from $1.13 billion in the third quarter of 2007 to $1.17 billion with the deal count remaining relatively unchanged at 70. Medical device companies posted their third-consecutive down quarter as investment fell 17% from $876 million to $727 million in the most recent quarter while the deal count held steady at 55.
According to the report, the business and financial services industry saw investment drop 26% from some $1 billion in the third quarter of 2007 to $740 million in the most recent quart as the financial institutions and services sector took a hit in the face of the economic crisis.
The consumer goods industry posted its best quarter on record with investment skyrocket to $223 million --- up 233% from $67 million --- on the back of larger cleantech-related deals in the vehicles and parts sector.
Focus Shifts to Older, Later-Stage Companies
The quarterly report also confirmed that many venture capitalists are choosing to focus on established portfolio companies as second and later-stage rounds dominated investment with $5.89 billion, or 82% of the quarter's investment total, put to work in 368 rounds -- versus the third quarter of 2007 when second and later-stage rounds accounted for 77% of capital investment.
Specifically, second rounds saw the largest gain with 150 deals and $1.88 billion, the highest investment total for these kinds of deals in two years. Conversely, investments in seed and first rounds dipped to $1.30 billion invested in 203 rounds, a two-year low in terms of investment.
The overall median size of a venture capital deal in the U.S. ---including all stages of development --- held steady with 2007 at $7.5 million, still the highest total on record.
Regional Perspectives
California dominated the venture capital activity in the third quarter of 2008, representing 45% of the nation's deal flow with 261 deals completed and nearly 56% of the capital invested with $4.10 billion. By major region, the report showed:
-- The San Francisco Bay Area saw a 22% jump in overall venture investment with $3.17 billion invested in 195 deals with much of the growth driven by record investments in health care and energy. This marks the highest investment total for the region since the first quarter of 2001.
-- Despite seeing investment drop nearly 10% to $867 million in 56 deals
--- its lowest deal count since 2005 --- Southern California was the second most-popular region for venture investment, once again beating out New England, which saw investment fall 23% to $769 million in 78 deals.
-- The New York Metro region attracted $559 million in 49 completed deals, 14% less than the $647 million invested in the third quarter last year.
-- The Potomac region saw capital investment fall 27% to $264 million with 21 deals closed in the quarter.
-- Investment in the Washington State dipped 10% to $210 million invested in 18 deals.
-- Texas recorded its second down quarter in a row as investment fell 73% to $119 million in 16 deals
-- Capital investment in the Research Triangle region jumped 124% from $33 million last year to $74 million with 10 deals closed in the most recent quarter.
For more information about Dow Jones VentureSource or to arrange a personal demonstration, visit http://www.venturecapital.dowjones.com or call 866-291-1800.
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) 2008
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