Venture Capital funding plummets to a 11 year low!
By Tarry Singh at 18 April, 2009, 5:34 pm
Venture capitalists invested just $3.0 billion 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 percent in dollars and 37 percent in deals from the fourth quarter of 2008 when $5.7 billion 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 $614 million going into 138 rounds, a drop of 42 percent in dollars and 34 percent in deals compared to the fourth quarter of 2008.
The Life Sciences sector (Biotechnology and Medical Devices combined) experienced a 40 percent decline in terms of dollars and a 31 percent drop in deals with $989 million going into 133 rounds. Investment in Biotechnology fell 46 percent to $577 million in the quarter, while Medical Device investments fell 27 percent to $412 million. Investments in Life Sciences companies represented 33 percent of all investment dollars and 24 percent 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 $154 million going into 33 deals in the first quarter. This represented an 84 percent decline in the dollar level in the Clean Tech sector from the fourth quarter of 2008 when $971 million 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 $556 million going into 123 deals in the first quarter, a 31 percent decrease in dollars over the fourth quarter of 2008 when $804 million 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 percent decline) Media and Entertainment (45 percent decline) and Networking and Equipment (47 percent 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 $108 million into 17 deals, an increase of 26 percent and 21 percent in dollars and deals, respectively.
Stage of Development
Seed and Early stage investing fell 45 percent in terms of dollars and 40 percent in terms of deals in the first quarter of 2009 with $852 million invested into 204 deals, compared to the fourth quarter when venture capitalists invested $1.6 billion into 338 deals. Seed/Early stage deals accounted for 37 percent of total deal volume in the first quarter, down from 39 percent in the prior quarter. The average Seed deal in the first quarter was $3.6 million, up slightly from $3.4 million in the fourth quarter; the average Early stage deal was $4.3 million in Q1, down from $5.1 million in the prior quarter.
Expansion stage dollars experienced the steepest decline in the first quarter, falling 60 percent in dollars and 47 percent in deals to $820 million into 146 deals. Overall, Expansion stage deals accounted for 27 percent of venture deals in the quarter compared to 32 percent in the fourth quarter of 2008. The average Expansion stage deal was $5.6 million, down notably from $7.5 million in the fourth quarter of 2008.
Investments in Later stage deals fell 35 percent in dollars and 22 percent in deals to $1.3 billion going into 199 rounds. Later stage deals accounted for 36 percent of total deal volume in Q1 compared to 29 percent in Q4 2008 when $2.1 billion went into 254 deals. The average Later stage deal in the first quarter was $6.7 million, which was down from the prior quarter when the average Later stage deal size was $8.1 million.
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The trend is quite evident from the facts presented. Venture capital investors are looking for multiple projects with small capital requirements than big businesses with huge investments. This is not too surprising in the macro environment that we are presently in. The companies which usually require heavy capital outlay such as telecom and networking have seen significant declines. The overall scenario, as I understand, has not turned out to be as gloomy as initially feared to be. This is good news for entrepreneurs. The focus now should be to seek small investments in businesses with quick break-even and positive cash flows. It is necessary for the entrepreneurs to be as clear as a crystal about the financial needs and future financial condition of their business. Translating their plans into numbers in the form of a financial model could be a great way of impressing the investors. I have found very interesting posts about financial models related to various businesses at http://www.financialmodel.net