New statistics that show a drop in national venture capital investments in the third quarter are a sign that investors are still proceeding with caution in an uncertain economy, but some VC leaders are spinning it as a summer break.
Venture capitalists invested $4.3 billion in 601 companies, down 26 percent from $5.9 billion they put into 794 companies during the second quarter this year, while merely matching last year's third quarter. That's according to the latest quarterly survey (PDF format) from the National Venture Capital Association, PricewaterhouseCoopers and Thomson Venture Economics.
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Transcript: Cindy Webb hosted Mark Heesen, president of the National Venture Capital Association.
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It's the second survey to show a decline for the third quarter. "Early Monday morning, VentureOne, a division of Dow Jones & Co. ... and Ernst & Young said investments came to $4.56 billion, down 16 percent from the second quarter," Dow Jones Newswires reported. It might be a case of economic doldrums, but also that investors were literally out to lunch (or on summer break, decreasing deal flow). "The summertime decline in VC activity isn't uncommon. Investments fell 24 percent from the second to the third quarters of 2002 and 25 percent in 2001," the wire service said.
• Dow Jones Newswires via The Wall Street Journal: Venture Capital Activity Dips in 3Q as Investing Slows (Subscription required)
"It's very much stabilizing," said Dave Furneaux of Kodiak Venture Partners, speaking of the market overall, during a conference call yesterday about the NVCA results. Furneaux, whose firm is based in Massachusetts, said the trends are toward capital efficiency, which is driving smaller-sized funding deals for individual companies. Paul Vais of Apax Partners noted during the call the numbers indicate that VCs were on vacation in August. "I don’t think it's a mega trend at all," Vais said, calling it "standard variation and people being picky about deals." He said the numbers support a "general feeling in the market that it is not being overfunded."
The NVCA put a similar positive spin on the numbers in its press release. "The lower level of activity in the third quarter is not concerning. To be frank, a 25 percent increase in venture investment would be more alarming. The industry is setting its own pace, with no pressure to accelerate or pour dollars into 'hot' areas," said Mark Heesen, the NVCA's president (Heesen will be online with me today on washingtonpost.com at 1 ET to take reader questions; you can submit your questions now or during the chat).
Investor's Business Daily cut through the spin. "Venture capital firms are more cautious because of lessons learned during the Internet boom, when money was thrown at any company with a Web address. But VCs remain prone to jumping onto a company that's hyped," the paper said. The lackluster numbers did bode well for technology companies overall. "On the high-tech side, software companies got the most money, while telecommunications continued its two-year slump," Reuters said.
The survey found 127 "life science" companies -- a category which covers the biotechnology and medical device industries -- received 29 percent of all venture capital during the quarter, or $1.26 billion. And 160 software companies attracted $942 million, representing 22 percent of all venture dollars. Telecom attracted just 10 percent, with $450 million invested in 58 companies. Most of the investments were additional rounds of funding, according to the study results.
• Investor's Business Daily: Wireless, Medical Gear, Biotech Are Hot VC Sectors
• Reuters via CNN: Venture Capital Flat From a Year Ago
For investment trends, Vais said there's interest in wireless technology, security software companies and semiconductor business.
"Despite the decline, early-stage activity held its own in the third quarter with 181 companies attracting $840 million and accounting for 30 percent of all deals. Early-stage deals were 29 percent of the total in the second quarter," Dow Jones said. Later-stage funding -- typically funding for more mature companies that have already received previous VC funding or have a track record of strong revenues -- was 30 percent of all investing during the quarter, or $1.3 billion, the survey said.
Venture: A Regional Look
The Washington Post ran a piece on the venture climate in the Washington area, a day in advance of the national VC study. In a nutshell, the piece found that VCs have a lot of cash to burn, but they are using it cautiously. This mirrored the national numbers, which showed money being divvied up to fewer firms. Meantime, companies are having to look for funding from different sources, including government-funded groups.
