Venture Investments Fell Back In 2008
20% Drop Reverses 4-Year Growth Trend
Monday, February 2, 2009; Page D01
Washington area venture capital investments fell 20 percent in 2008 as the economic downturn and credit crunch left fewer sources of financing available for such deals, according to a report.
Industry analysts said the decrease in local venture investments, which reversed a steady yearly increase in deal flow since 2004, mirrored a national trend: Turmoil in the financial markets made it difficult to close new deals and had venture capitalists focusing on nurturing companies in the later stages of development, though some start-ups were funded.
A total of $1.015 billion in 190 disclosed venture deals was raised in 2008, compared with $1.271 billion in 211 deals in 2007. Nationally, venture capital investment declined 8.4 percent, to $28.3 billion in 2008, compared with $30.9 billion in 2007, according to the MoneyTree Report on quarterly venture financing by PricewaterhouseCoopers and the National Venture Capital Association. Not all funding is disclosed.
In the fourth quarter of 2008, during the worst of the year's financial turmoil, venture deals locally increased 48 percent from the third quarter. A total of $322.4 million was raised in 48 venture capital deals during the fourth quarter, compared with $217.4 million in 45 deals during the previous quarter. However, fourth-quarter investments declined 24 percent locally when compared with the same quarter of 2007, according to the MoneyTree Report.
The credit crisis made it more difficult for start-ups to go public or be acquired by larger firms -- the main ways venture capitalists get their money back to make new deals, experts said. Large institutional investors such as universities, banks, life insurance companies and pension plans have also pulled back their funding of new deals.
"The principal sources of capital for venture capitalists have pretty much shut the door," said Jack Biddle, general partner at Novak Biddle Venture Partners in Bethesda. "The growth and the sales of portfolio companies has kind of fallen off a cliff."
With uncertainty still high in 2009, most venture funds are investing their money in their current portfolio of companies and are not going after new ideas, said S. Tien Wong, chairman and chief executive of Opus8, a private investment firm in Chevy Chase.
"There is more uncertainty and a lower degree of confidence that companies can get to the next level," Wong said. Venture capitalists "are being very careful about new deals, and they are also very Darwinian about where they spend their money, so if they have a portfolio of many companies then they are going to deny capital to some."
Wong said that the environment will be challenging for any start-up in the foreseeable future and that more traditional kinds of financing for fledgling companies such as money from family and friends might become more common. The bottom line: "There are going to be fewer start-ups," he said.
In the Washington area, software firms got the biggest payments in the fourth quarter, with $146.7 million in 16 deals. The runners-up were companies that make medical devices and equipment getting $31.4 million invested in five deals, and industrial and energy firms getting $31.5 million in six deals.
Mark G. Heesen, president of the National Venture Capital Association of Arlington, said the Obama administration is likely to drive a demand for clean technology, the life sciences and health information technology.
This should bode well for the Washington region, as the government will likely continue to be a big spender as the federal bureaucracy expands and as programs enacted to create jobs and stimulate the economy get underway, he said.
"There is going to be a lot of money out there, and from a Washington perspective that is important because the government is going to be a customer, the government is going to be buying," he said. "Entrepreneurs in Washington may have a better idea of the government's needs, they also aren't scared by the government, so they could have a leg up on a lot of other companies across the country."
In terms of venture capitalism on a whole, though, it remains to be seen whether the coming year will tighten investment even further.
"The first two quarters of the year are going to be more telling than anything we saw in the fourth quarter," Heesen said. "We are now kind of really going to start seeing the impact of the global recession, I think it has taken a while for venture capital to feel it. Because we are such long-term investors, it hits us a little bit later than it does other areas."