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VC investment momentum continues in third quarter

New data from Chubby Brain shows that venture investment upticked nicely in the third quarter. The big unknown is if this trend will continue.

Things are getting better for entrepreneurs, according to data released Tuesday by information services provider Chubby Brain.

Top 10 VC cities Q309 Chubby Brain

Venture investment hit a multi-year low in the first quarter of 2009, reaching $5.3 billion in the second quarter and jumping a respectable 14 percent to $6.1 billion in the third quarter of 2009.

Statistics in The Pulse of the Innovation Economy report for Q309 certainly help quantify a resurgence in Silicon Valley, but we can't forget that entrepreneurs drive innovation, while venture capitalists facilitate it. Yes, money is often necessary, but the entrepreneurial need to solve complex problems is what has propelled the information economy.

A few highlights:

  • Invested dollars went up by 14 percent, with an 11 percent increase in number of deals
  • September seemed to be right time to raise money with 40 percent of third-quarter deals occurring in the month
  • California, and specifically the San Francisco Bay Area and Silicon Valley is the most likely location to raise money.
  • Health care investing saw the most activity while green investors sat on their recycling cans

It should come as no surprise that the San Francisco Bay Area/Silicon Valley is responsible for a large portion of third-quarter funding, taking 7 of the top 10 ranking spots. This is not a knock against other geographies, just a realistic recognition of how densely packed the valley is with VCs.

This of course leads to the ongoing debate as to whether you need to be in the valley to raise money. Meebo CEO Seth Sternberg recently wrote that if you need to find cofounders for your business idea "nowhere has as many real estate agents, lawyers, accountants, landlords, employees, cofounders, mentors, and VCs all steeped in start-up culture as does Silicon Valley. The ecosystem is just hard to beat. The result is that you'll be exposed to many more people who can help you get started."

I asked Chubby Brain's Anand Sanwal for a quick summary of how the layman can easily make sense of the research data. He suggests we use both the glass half-empty and glass half-full approach to balance out the information.

Glass half-full: The third quarter of 2009 was way up over the financing bottom seen in the first quarter of 2009. Investors and entrepreneurs both agree that that activity is picking up considering how much money has been on sidelines. VCs make money from their returns on their investments so they have to put the cash to work.

Glass half-empty: While $6.1 billion in the third quarter of 2009 is a lot of money, it's still down fairly significantly from the $7.2 billion invested in the third quarter of 2008. The real uncertainty is whether pre-crisis VC funding levels will ever be reached again. And don't forget that VCs raised on $1.6 billion in new funds in the third quarter, with a few large funds taking the lions share of investment dollars.

Many pundits believe that we're going through a "right-sizing" of the VC asset class leading to less VCs and potentially less investments. I'm not sure that either is bad. The IT industry needs more high-quality innovative technological advancements to offset all the money wasted on ad-supported business models.