Venture Capital Plummets To Twelve-Year Low: Report

by Phillip Morton, Investors Offshore.com

27 April 2009

Venture capitalists invested just USD3.0bn in 549 deals in the first quarter of 2009, according to the MoneyTree Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly investment activity was down 47% in dollars and 37% in deals from the fourth quarter of 2008 when USD5.7bn was invested in 866 deals. The quarter, which saw double digit declines in every major industry sector, marks the lowest venture investment level since 1997.

"It's no surprise that venture capital investing dropped in the first quarter," said Tracy Lefteroff, Global Managing Partner of the venture capital practice at PricewaterhouseCoopers LLP. "Given the economic turmoil that began in the third quarter of 2008 and continued on into 2009, it's not unexpected that the VCs would pause to assess the impact on their portfolio companies before again looking forward to their next investment."

Mark Heesen, President of the NVCA remarked: "These numbers clearly demonstrate that the venture capital industry is not immune from the current economic downturn. Venture capitalists have slowed their investment pace in order to work with existing companies that are not able to exit the venture portfolio due to the shuttered IPO window and the weakening acquisitions market. That said, those venture firms that have the ability to invest at this time are doing so as there remain entrepreneurs with game changing technologies waiting to be funded. While this drop in investment is significant, we are not forecasting levels to continue to fall further. We would expect a mild and steady increase in investment throughout the rest of the year, particularly if the exit pipeline is allowed to clear."

Industry Analysis

Declines in the first quarter of 2009 were spread across almost every industry sector in both the level of dollars and number of deals. The Software sector received the highest level of funding with USD614m going into 138 rounds, a drop of 42% in dollars and 34% in deals compared to the fourth quarter of 2008.

The Life Sciences sector (Biotechnology and Medical Devices combined) experienced a 40% decline in terms of dollars and a 31% drop in deals with USD989m going into 133 rounds. Investment in Biotechnology fell 46% to USD577m in the quarter, while Medical Device investments fell 27% to USD412m. Investments in Life Sciences companies represented 33% of all investment dollars and 24% of all deals in the first quarter, which is in line with historical norms.

The Clean Tech sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, saw a substantial drop in investment levels with USD154m going into 33 deals in the first quarter. This represented an 84% decline in the dollar level in the Clean Tech sector from the fourth quarter of 2008 when USD971m went into 67 deals. This quarter marks the lowest investment level for the Clean Tech sector since 2005. In a departure from past quarters, the clean tech sector had only one of the top ten largest deals in the first quarter.

Internet-specific companies garnered USD556m going into 123 deals in the first quarter, a 31% decrease in dollars over the fourth quarter of 2008 when USD804m went into 180 deals. ‘Internet-Specific’ is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.

Other industry sectors that experienced significant investment dollar declines in Q1 2009 included Telecommunications (72% decline) Media and Entertainment (45% decline) and Networking and Equipment (47% decline). The only industry sector which experienced an increase in both dollars and deals in the first quarter of 2009 was Financial Services. This sector garnered USD108m into 17 deals, an increase of 26% and 21% in dollars and deals respectively.

Stage of Development

Seed and Early stage investing fell 45% in terms of dollars and 40% in terms of deals in the first quarter of 2009 with USD852m invested into 204 deals, compared to the fourth quarter when venture capitalists invested USD1.6bn into 338 deals. Seed/Early stage deals accounted for 37% of total deal volume in the first quarter, down from 39% in the prior quarter. The average Seed deal in the first quarter was USD3.6m, up slightly from USD3.4m in the fourth quarter; the average Early stage deal was USD4.3m in Q1, down from USD5.1m in the prior quarter.

Expansion stage dollars experienced the steepest decline in the first quarter, falling 60% in dollars and 47% in deals to USD820m into 146 deals. Overall, Expansion stage deals accounted for 27% of venture deals in the quarter compared to 32% in the fourth quarter of 2008. The average Expansion stage deal was USD5.6m, down notably from USD7.5m in the fourth quarter of 2008.

Investments in Later stage deals fell 35% in dollars and 22% in deals to USD1.3bn going into 199 rounds. Later stage deals accounted for 36% of total deal volume in Q1 compared to 29% in Q4 2008 when USD2.1bn went into 254 deals. The average Later stage deal in the first quarter was USD6.7m, which was down from the prior quarter when the average Later stage deal size was USD8.1m.

First-Time Financings

The dollar value of first-time deals (companies receiving venture capital for the first time) declined by 48% to USD596m going into 132 first rounds, compared to the fourth quarter of 2008 when USD1.1bn went into 246 first-time deals. First-time financings accounted for 20% of all dollars and 24% of all deals in the first quarter compared to 20% of all dollars and 28% of all deals in the fourth quarter of 2008.

Companies in the Biotechnology, Industrial/Energy and Software sectors received the highest level of first-time dollars. The average first-time deal in the first quarter was USD4.5m compared to USD4.6m one quarter ago and USD5.2m one year ago. Seed/Early stage companies received the bulk of first-time investments garnering 59% of the dollars and 70% of the deals.

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