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VC investments sink 51 percent

Venture capital cash flow to start-ups plummets to $3.7 billion in the second quarter, compared with $7.5 billion a year ago.

Venture capitalists are drawing their purse strings tighter than ever in reaction to the economic downturn.

Money from VCs to start-ups and IPOs sunk to $3.7 billion in the second quarter, a drop of 51 percent from $7.5 billion in the year-ago quarter. This marks the lowest ongoing level of venture capital funding over the past 12 years, according to a MoneyTree report released Tuesday by PricewaterhouseCoopers and the National Venture Capital Association (NVCA). The report was based on statistics from Thomson Reuters.

Although VC spending rose slightly from the first quarter's $3.2 billion, the ongoing decline marked the first time since 1997 that venture capitalists spent less than $7 billion during the first half of a year.

The tough economy has limited the ability of start-ups to fund IPOs, which in turn has made it harder for venture capitalists to profit from their investments.

"Halfway through 2009 we are seeing more positive signs than at the beginning of the year, including an overall increase in investment levels and an ongoing interest in seed and early stage funding," Mark Heesen, NVCA's president, said in a statement. "However, until we see notable upticks in venture fundraising and exit activity--which drive investment levels--we won't expect considerable increases in the number of deals completed each quarter."

Among business segments, biotechnology scored the most venture capital at $888 million, though that represented a 16 percent decline from the year-ago quarter. VCs tend to like the biotech sector because large drug companies are always looking to buy start-ups creating promising new drugs.

VC interest in the Internet has been weak. Investment in that segment plunged by 68 percent from a year ago to $524 million. Other segments hit by drops in VC funding included semiconductors, media and entertainment, and telecommunications.