Venture capital activity in the first quarter dropped significantly as fewer and smaller deals were done after several quarters of hefty later-stage investing in area companies.
The MoneyTree survey of venture investing showed 32 investments in Washington area companies in the first quarter, for a total of $139.1 million. In the previous quarter, $381.5 million was invested in 43 deals. Industry sources said the decrease reflected the timing and nature of the transactions, not a broader decline in investing. In the past two years, venture investing in the Washington area has been increasing steadily, largely because of heavy investing in later-stage and biotechnology companies here, said Suzanne Hubbard, a partner in the technology practice of accounting firm PricewaterhouseCoopers.
"There's still a lot of activity," Hubbard said. The first quarter "was more of an anomaly."
Hubbard noted that the first quarter saw a "big bump" in first-time financings, showing that venture investors are putting more money into companies with the most room to grow. More than half of the venture funding in the most recent quarter went to first-time financings, up from 19 percent the previous quarter.
Venture capital is the earliest form of outside equity financing for new companies, and it is especially favored by technology firms. Typically, the first round of venture investing is small, sometimes less than $1 million. But venture capital funds that make investments in such early-stage companies usually commit to making later, larger investments if the company grows.
In the first quarter, early-stage companies received 24 percent of the total invested in Washington area firms, compared with 8 percent in the previous quarter, according to the survey, which is conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
Valhalla Partners, a Vienna venture fund that focuses on early-stage technology firms, closed three deals in the first quarter, its most active quarter since it was founded in 2002. Two of the three companies that Valhalla put money into were early stage: BD Metrics Inc. and RealOps Inc.
Valhalla partner Arthur J. Marks said venture capital firms are beginning to get comfortable with early-stage companies, which are the most risky but also have the most profit potential.
"Post the dot-com meltdown there was a significant shift to later-stage deals, a kind of risk-avoidance strategy," he said. "A much smaller percentage went into early-round deals. Today I would say that early-stage deals are up . . . 20 percent. That's a real positive sign in terms of venture moving out of protecting old deals into pursuing new opportunities."
