More Money to Work in Fewer Deals

Deals inched higher in the first quarter as VCs favored later stage investments and returned with interest to cleantech and life sciences, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on data from Thomson Reuters (publisher of VCJ).

U.S. venture firms put $5.9 billion to work in the first three months of 2011, a 13% rise from Q1 2010 and a 5% increase from the fourth quarter of 2010 when VCs invested $5.6 billion, according to the report.

Deal volume fell to 736 transactions, an 11% drop from the 827 deals in the fourth quarter. It was the lowest level of activity since the third quarter of 2009, the report stated.

The quarter is the latest sign that the recovery in venture capital continues at a slow pace. It also suggests that GPs are looking with interest at a revival in the IPO market and preparing companies to launch future offerings.

Companies take longer to go public these days and require private capital to continue growing, Philip Bronner, general partner at Novak Biddle Venture Partners, said on a conference call arranged by the NVCA.

Late stage deals continue to be of particular interest to VCs. The quarter saw a 54% surge in capital and an 11% hike in deal volume for late stage deals, as $2.1 billion went to 196 late stage rounds. The average deal size was $10.9 million, up from $7.8 million in the fourth quarter.

Seed and early stage investments rose 11%, but deal volume dropped 14% for both from the prior quarter. The average seed deal size fell to $2.2 million, but the average early stage transaction rose to $6.4 million from $4.8 million in the fourth quarter.

As usual, software startups attracted the most venture capital in Q1. VCs did 187 rounds totaling $1.1 billion for software companies in the first quarter, a 9% decrease in dollars and a 21% decrease in number of rounds from Q4.

Cleantech investing jumped 26% from the fourth quarter in terms of dollars to reach the $1 billion mark, and life sciences investing climbed 16%, with biotech investing up 6%, and medical devices and equipment ahead 34%.

Internet companies received $1.2 billion in the three-month period. But the quarter saw a 19% decrease in funding from the prior quarter for Internet-specific companies, despite the excitement stirred up by Facebook, Groupon and Twitter. It is hard to interpret that as a significant trend, as the MoneyTree Report tracks investment only in U.S.-based companies. Domestic VCs are increasingly investing abroad and there have been several huge deals for Internet companies based in China and elsewhere this year.

Meanwhile, the quarter saw 14 deals of $50 million or greater, more deals than in any quarter since the third quarter of 2001. Six of the quarter’s top 10 transactions were in cleantech, including BrightSource Energy’s $201.7 million funding, Fisker Automotive’s $111.9 million round and SoloPower’s $78.6 million deal.

The industry should get used to this level of investing in cleantech, since corporate interest in the sector is expanding, Ira Ehrenpreis, general partner of Technology Partners, said on the conference call.