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VC suffers fifth straight down quarter

Venture capital investments fell in the second quarter, marking the fifth consecutive quarterly decline in funding deals.

Venture capital investments fell in the second quarter, marking the fifth consecutive quarterly decline in funding deals, according to figures released Monday by Venture Economics and the National Venture Capital Association.

The results represent further evidence of a funding slowdown, as venture capital firms concentrate on bolstering companies already in their portfolios and further scrutinize the companies that are seeking investments.

During the quarter, venture capitalists invested $10.6 billion into 982 companies--a 12 percent decrease from the previous quarter and a 61 percent drop from year-ago figures.

One sector to see a rise in funding was Internet hardware. That was the only Internet-related area to see funding levels rise--climbing 34 percent to $280 million in the second quarter from $208.7 million in the previous quarter.

Internet hardware is just one area pulled from all industry categories to comprise the Internet-related sector. Some companies in this group, for example, may appear in both the Internet-specific sector and biotech sectors. And in the Internet-related sector, e-commerce and content companies attracted the most funding with $2.3 billion in investments. That was followed by communications and Internet-infrastructure companies, with nearly $2 billion in investments. Internet software and tools ranked third with $1.95 billion invested.

The Internet sector captured nearly a third of the $10.6 billion invested in companies--reaching $3 billion. But its share of the overall investment pie fell to 28.4 percent in the second quarter from 34.4 percent in the previous quarter.

The next-largest investment sector was the computer software and services industries. Companies in that sector scored $2.2 billion investments, or nearly 21 percent of all venture dollars.

Internet-related companies that recently received funding include Storm Telecommunications, which captured a $35 million second round led by Soros Private Equity Partners. Storm offers voice, bandwidth and Internet protocol services.

Venture capitalists also continued their preference for diversification in the quarter.

Companies seeking early rounds of funding, along with later-stage companies that are gearing up for an initial public offering, received a smaller piece of the pie compared with the previous quarter, according to the report. But start-ups in the expansion mode captured 55 percent of the investment pie, up from 47 percent in the previous year.

"This quarter's disbursements statistics reflect the long-term nature of venture investing," said Mark G. Heesen, president of the National Venture Capital Association. "With an eye to the future, venture capitalists are working to build the companies in their current portfolio. At the same time, venture capitalists are increasing the diversification of their portfolios, both in terms of industry sectors and stage of development."