VC investments sink to lowest levels in 12 years

The $17.7 billion invested by venture capitalists in 2009 marked the lowest point since 1997, though the fourth quarter showed some positive signs.

The weak economy of 2009 took its toll on venture capitalists , though the year ended with hints of a recovery in store, says a new MoneyTree report.

VCs spent only $17.7 billion on 2,795 different deals last year, the lowest dollar amount and number of investments since 1997, according to the report released Friday by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on data from Thomson Reuters.

The numbers amounted to a 37 percent drop in dollars and a 30 percent fall in the volume of deals from 2008, marking the second consecutive year of declines. But the year ended on a promising note: investments in the fourth quarter reached $5 billion, a 2 percent slump in dollars but a 15 percent gain in the number of deals from the third quarter, the report noted.

"The venture capital industry had no choice but to slow the investment pace in 2009," said Mark Heesen, president of the NVCA, in a statement. "The weak exit environment resulting from an unstable public market combined with a challenged limited partner base sent a strong message to the venture community to pull back the reins -- and the VC's listened."

Declines hit a variety of segments where VCs typically invest, including clean technology , biotechnology, and software.

The clean tech sector includes alternative energy, recycling, and conservation, typically areas ripe for venture capital. But with $1.9 billion invested in only 185 deals, clean tech saw its dollar investments drop by 52 percent and the number of deals fall by 31 percent in 2009.

Investments in biotechnology fell by 19 percent in both dollars and the number of deals. But biotech stood out as the strongest sector for the year, generating $3.5 billion in 406 separate investments. It also proved the the most popular sector in the fourth quarter, with a 10 percent growth in investment dollars and the only area that garnered more than $1 billion in the quarter.

The story was similar for investments in software companies. For the entire year, VCs spent only $3.1 billion in this sector, a 40 percent drop in dollars and 35 percent fall in the number of deals from 2008. But the fourth quarter alone saw $959 million spent on 177 deals, the highest numbers for the entire year.

For 2009, first-time finances dropped to their lowest level since 1995. However, seed-stage investments, typically modest amounts of money given to entrepreneurs in the early stage of development, rose 2 percent. And in another hopeful sign of a turnaround in 2010, the number of first-time and early-stage investments grew in the fourth quarter, according to the report.

"Now that the economy has begun to show signs of improvement, we expect to see dollars flow more freely back into those sectors that offered the most promise before the recession began--clean technology, life sciences and IT," said Heesen. "The seed and early stage pipeline needs replenishing across all industries and the health of the start-up community in the next decade will be dependent upon more robust first-time financings."

The results for the report were culled from a quarterly survey of venture capitalists conducted by Thomson Reuters.

A report on venture capital investments from Dow Jones echoed similar results, noting that 2009 was a bad year that ended on an encouraging note.

Venture capitalists invested $21.4 billion in 2,489 different U.S. companies in 2009, according to statistics from Dow Jones VentureSource, a 31 percent drop from 2008. But the final quarter of the year saw $6.3 billion spread among 743 deals, a slight gain from the $6.1 billion put into 619 deals in 2008's fourth quarter.

Despite the optimism generated by the stronger fourth quarter, VentureSource believes the market for VC investments will still be tight and highly competitive in 2010.

"While venture capitalists as a group loosened their purse strings toward the end of 2009, some start-ups, especially those seeking first or second rounds, may be in for a rude awakening in 2010," said Scott Austin, editor of Dow Jones VentureWire, in a statement. "A large share of companies are due for capital this year and the competition will be fierce."

About the author

Journalist, software trainer, and Web developer Lance Whitney writes columns and reviews for CNET, Computer Shopper, Microsoft TechNet, and other technology sites. His first book, "Windows 8 Five Minutes at a Time," was published by Wiley & Sons in November 2012.

 

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