Investors Take a Breather, Deals Dip in Q3 –

The third quarter is typically restful time, with many VCs taking summer vacations. Did they take off too much time this year?

That’s one of the tongue-in-cheek explanations for why so few deals got done. Venture capitalists did just 601 deals in the third quarter, down from 692 in the third quarter of last year and down from nearly 800 in the second quarter, according to the Pricewaterhouse-Coopers/Thomson Venture Economics /NVCA MoneyTree Survey. The last time the quarterly total was that low was in the fourth quarter of 1995, when roughly 500 deals were recorded.

While the number of deals declined, the dollar amount invested by venture firms in the past quarter was just about the same as it was in Q3 of last year-$4.3 billion.

What accounts for the decline in the number of deals? No one is quite sure. All of the VCs contacted by Venture Capital Journal said they were surprised to hear that it had gone down. Asked to describe the investment environment, they used words like “healthy,” “balanced” and “stable.” Two of them said that if the numbers in the survey are an “aberration.”

“If the numbers are right there are probably two factors at work: One, we’re looking at a statistical aberration, or, two, it’s possible the industry is still digesting the heavy pace of deals in the second quarter,” says Vincent Occhipinti, co-founder and managing director at the Woodside Fund, an early stage investor based in Redwood Shores, Calif.

VCs invested $5.9 billion in 794 deals in the second quarter, the largest total in both dollar amount and number of deals since the second quarter of 2002.

Could it be that such a big quarter took the wind out of everyone’s sails? “Maybe Sun Valley had a great deal on condos in August,” jokes Paul Vais, a partner in the Menlo Park, Calif., office of Apax Partners.

Whatever is behind the numbers, no one is terribly concerned. Sandy Ribeiro, U.S. Research Director for Thomson VE, says the third quarter is “in line with historical norms.”

VCs from both ends of the spectrum say they haven’t noticed any slowdown and that the pace of investing is healthy.

“It feels like it’s in balance right now,” says Vais of Apax, a global private equity firm that invests in everything from early stage venture deals to buyouts. He says that the amount of money available for quality deals isn’t out of whack, so “you don’t see bad deals getting done because people eager to put money out.”

Over at San Francisco’s Blueprint Ventures, which focuses on seed-stage deals, Managing Partner George Hoyem says, “Deals are getting done; people are pretty active.”

Others agree that it’s business as usual. “We didn’t see any change in the third quarter” in the pace of investing, says Alay Desal, a director of business development for Microsoft.

Jon Staenberg, a managing director in the Seattle office of Rustic Canyon Partners, says the Seattle area has picked up and is going strong. “For the last three quarters we’ve seen $200 million per quarter in local VC investments,” he says. “The biggest quarter prior to that was $100 million.”

There are other signs that the venture business is back on track. Blueprint’s Hoyem says he is particularly encouraged by an increase in valuations from A to B rounds. “Two years ago just about every round was a flat or down round, but in the past year or year and a half the stratification has come back,” he says. At the same time, “we’re not seeing irrational valuations,” Hoyem says.

The MoneyTree survey shows that the average post-money valuation for “expansion” rounds (typically Series B and C) increased from $51 million in Q2 to $55 million in Q3. The post-money valuation for early-stage deals held steady at $12.5 million from the second quarter to the third.

That modest increase in valuations for North American deals stands in stark contrast to what’s going on in the overheated Chinese market. Lip-Bu Tan, founder and chairman of Walden International, told the audience at last week’s International Business Forum in San Francisco that he has seen valuations for some Chinese startups go from $50 million in a Series A to $150 million in a Series B. “It’s hard to swallow such large valuations,” Tan said. “Sometimes we just have to walk away from deals.”

Jerry Borrell contributed to this story .