A Quarter to Forget

The only good thing you can say about the first quarter is that it’s over.

On every count, Q1 2009 was terrible for venture capitalists. The amount they invested in companies was the smallest figure since 1997; the amount they raised for their funds was the smallest in about four years; none of their portfolio companies managed to go public for a record second straight quarter; and the amount they raised from selling portfolio companies was the lowest figure in more than 14 years.


U.S. venture capitalists invested just $3 billion in 549 deals in the first quarter, down 61% from the $7.7 billion invested in 997 deals in Q1 2008, representing a 61% decline in dollars and 45% decline in the number of deals, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association (NVCA). (MoneyTree is based on data from Thomson Reuters, which is the publisher of VCJ.)

Compared to the fourth quarter of 2008, when VCs put $5.7 billion into 866 deals, first-quarter venture investment declined by 47% in dollars and was down 37% in the number of deals.

Every major investment sector experienced double-digit declines from the fourth quarter. Most notably, the cleantech sector, which has been growing like a weed, experienced a huge drop in funding. VCs invested just $154 million in 33 cleantech deals in Q1, down 84% from the $971 million that was invested in 67 deals in the fourth quarter. The first quarter marked the smallest amount invested in cleantech since 2005.

Software companies received the largest amount of venture backing, with $614 million going into 138 rounds, but that was a 42% decline in dollars and a 34% decline in the number of deals for software developers in Q4.

Faced with a recession and a terrible exit environment, VCs are hanging onto their cash for follow-on investments for their existing portfolio companies. They are less and less likely to do a brand new deals unless it’s a sure thing.

“There’s been a flight to quality,” says Richard Yen, a director with Saban Ventures, a Los Angeles-based venture firm backed by billionaire media mogul Haim Saban.

Saban Ventures has offered three term sheets this year only to be outbid on all three of them. “There are only a few things we’ve gotten excited about, but when we have there have been a lot of people sniffing around,” Yen notes.

Saban offered term sheets for a Series A round for a mobile company run by a successful repeat entrepreneur who was seeded by a Sand Hill Road firm; a Series A round for a direct response marketing company (a la Cash4Gold) run by an entrepreneur with 20 years in the direct response business; and a seed round for an entertainment website run by a “high-profile personality.”

The fact that Saban was outbid on all three deals has Yen worried that “there won’t be price resets for those [good deals]. Only a few deals are going to be done, and they’re not going to be cheap.”


Raising a venture fund is never easy, but with limited partners on lockdown, it’s become tantamount to trying to ice-skate uphill.

There’s been a flight to quality.”

Richard Yen

“I’ve raised six venture funds and the market’s never been tougher,” says Immanuel Thangaraj, a managing director at Essex Woodlands Health Ventures.

That may sound odd coming from a VC whose firm recently announced that it had raised $900 million for its eighth fund. But the truth is that Essex Woodlands had raised the bulk of the fund, or $800 million, last summer. Since then, the stock market has tumbled and the firm abandoned its $1 billion target.

Essex Woodlands isn’t the only firm feeling the pinch. Just 40 venture capital funds raised $4.3 billion in the first quarter, according to Thomson Reuters and the NVCA. Those figures were down sharply from the first quarter of 2008, when 71 funds raised $7.1 billion.

While the total amount raised in Q1 increased was larger than Q4, which came in at $3.5 billion, the number of funds raised was the lowest since the third quarter of 2003.

Firms with successful track records or at least several funds under their belts seem to be the only ones able to raise money. Charles River Ventures last quarter raised $320 million for its 14th fund, Trinity Ventures raised $276 million for its 10th vehicle, and Bessemer Ventures raised $350 million for its seventh fund.

The largest fund-raiser for the quarter was August Capital, which raised $650 million for its fifth fund.

Secondary investor Index Ventures also raised a sizeable fifth fund, putting together $441 million from limited partners.

The difficult environment has some firms scaling back their plans. For example, New Enterprise Associates, which filed a regulatory document in December indicating that it planned to raise $3 billion for its 13th fund, told two investors that it has lowered its target to a range of $2 billion to $2.5 billion, according to an April 15 report by VentureWire. NEA raised $2.52 billion for its 12th fund in 2006, according to Thomson Reuters.

The hardest hit venture firms are likely to be the ones without a well-established track record. But at least some investors seem willing to take a measured risk.

Consider Sail Venture Partners. The energy-focused cleantech investor launched its first fund in 2006, raising $60 million from limited partners anxious to gain exposure to the cleantech business.

Although the firm has yet to have an exit, it has managed to raise more than $60 million toward a second fund that aims to raise as much as $250 million, according to regulatory filings.


The exit market for venture-backed companies remained in a deep freeze in Q1. There wasn’t a single VC-backed IPO in the first quarter, following a big zero in Q4. It is the first time the venture industry has seen two consecutive quarters without an IPO since data have been tracked by the NVCA and Thomson Reuters.

Additionally, no company with backing from a U.S. venture firm went public on a foreign exchange in Q1.

I’ve raised six venture funds and the market’s never been tougher”

Immanuel Thangaraj

In a glimmer of hope, two private equity-backed companies managed to go public the week of April 13: Bridgepoint Education Inc. (NYSE: BPI) and Rosetta Stone Inc. (NYSE: RST). Bridgepoint, which operates traditional and online universities, raised $141.75 million and Rosetta Stone, which makes language learning software, raised $112.5 million.

Rosetta posted the strongest performance of the two, even after pricing above its expected range of $15 to $17. It priced at $18 per share on April 16 and shot up to $25.12 by the end of the day. Rosetta’s owners include ABS Capital Partners, Norwest Equity Partners and Madison Capital Funding.

Bridgepoint priced well below its expected range of $14 to $16. It shot out the gate at $10.50 on April 15 and closed at $11.10 at the end of the day. The company’s owners include VentureTek and Warburg Pincus.

There is no shortage of venture-backed companies that would like to follow in the footsteps of Bridgepoint and Rosetta. A total of 26 VC-backed companies were in the IPO queue as of April 1, just two shy of the number in registration in Q4.


While the IPO market has been completely frozen for venture-backed companies, they haven’t found much relief in trade sales. The total disclosed deal volume for VC-backed M&A in Q1 was the lowest figure in more than 14 years, according to Thomson Reuters.

A total of 56 venture-backed M&A deals were reported for the first quarter, 13 of which had an aggregate deal value of $645.3 million. In contrast, 106 VC-backed companies were acquired in Q1 2008 for a combined disclosed value of $4.54 billion.

You have to go all the way back to Q4 1994 to find a worse quarter: That’s when 17 VC-backed companies were acquired for a combined disclosed deal value of $453 million.

The biggest M&A deal was for Ablation Frontiers Inc., which makes technology used in cardiac therapy focusing on atrial fibrillation. It was acquired by Medtronic Inc. for $225 million. The Carlsbad, Calif.-based company had previously raised a little over $40 million over four rounds from Aberdare Ventures, Affinity Capital Management, FirstMark Capital, Hexagon Investments, Novartis Venture Fund, Trellis Health Ventures and Versant Ventures, according to Thomson Reuters.

The only other Q1 deal with a value in excess of $100 million was for Stratalight Communications Inc., a maker of dense wavelength division multiplexing fiber optic systems. The Los Gatos, Calf.-based company was bought by OpNext Inc. for $172 million, after raising a little over $95 million over six rounds from Comcast Interactive Capital, Intel Capital, Photonics Fund, TL Ventures, U.S. Venture Partners and Velocity Interactive Group (FKA: ComVentures), according to Thomson Reuters.

Overall, the largest number of VC-backed companies acquired in Q1 were in the information technology. A total of 42 IT companies were bought for a combined disclosed dollar value of $348.2 million. Within the IT sector, computer software and services companies accounted for most of the deals done, with a total of 24 transactions.

The life sciences sector saw 11 deals with a combined disclosed value of $297 million.

Last but not least, non-high tech deals accounted for three exits with undisclosed values.