Venture Capital Investment Falls 8% in 2008

Venture capitalists disbursed just $5.5 billion to 554 U.S.-based companies in Q4, according to Dow Jones VentureSource. That would bring the full-year total to $28.8 billion, which is down 8% from the $31.4 billion disbursed in 2007, but just above the $28.2 billion disbursed in 2006.


Venture capital investment in U.S. companies hastened its descent in the fourth quarter of 2008 with 554 deals garnering $5.5 billion, down 30% from the $7.9 billion invested in 718 deals during the same period in 2007 and the lowest quarterly investment the industry has seen in three years, according to statistics released today by Dow Jones VentureSource ( In total, 2008 saw 2,550 deals completed and $28.8 billion in venture capital invested in U.S. companies, down 8% from 2007 when $31.4 billion was invested in 2,823 deals but still ahead of the $28.2 billion invested in 2006.

“The data confirms what we’ve being hearing anecdotally for some time that many venture capital firms are circling the wagons to weather the downturn and are focusing more on the health and vitality of current portfolio companies rather than new investments,” said Jessica Canning, director of Global Research for Dow Jones VentureSource. “And while traditional areas of investment like IT and health care, which are well stocked with venture-backed companies, are seeing predictable pull-backs, VCs are still eager to put capital to work in burgeoning areas like energy and consumer goods, which saw record investment in 2008.”

Ms. Canning added: “Frankly, if you have a promising business model and can land funding, it’s a good time to start a company right now, as the cost of doing business is much lower. There is plenty of talented labor available and established companies are focused on conserving capital rather than competing directly with new ventures.”

By the Numbers: IT, Healthcare Slump

The data showed that the U.S. Information Technology (IT) industry posted its weakest quarter since 1998 with just $2.2 billion invested in 266 deals in the fourth quarter of 2008, down 39% from the $3.6 billion invested in 355 deals over in the same quarter of 2007. In total, the IT industry saw overall investment drop 15% to $11.6 billion invested in 1,237 deals from $13.6 billion invested in 1,430 deals in 2007.

Within IT, the last quarter of 2008 was the worst quarter for software-specific investment since the first quarter of 1997. Software investment fell 54% to $690 million in just 114 deals in the fourth quarter of 2008 from more than $1.5 billion put into 159 deals during the same time in 2007. Overall, software investment reached its lowest point in 10 years with $4.7 billion put into 566 deals in 2008. In contrast, the Web-centric information services sector attracted record annual investment in 2008 with $2.7 billion put into 357 deals, up 17% from $2.3 billion in 337 deals in 2007, but saw its investment figures decline quarter-to-quarter after hitting a record high of $821 million in the first quarter of the year.

According to VentureSource, the U.S. health care industry saw venture investment slip to its lowest point in three years in the last quarter of 2008 with more than $1.5 billion invested in 137 deals, down 42% from the $2.6 billion the industry garnered in 190 deals in the fourth quarter of 2007. For the year, health-care venture investment fell 22% to $8.2 billion put into 623 deals in 2008 from the record $10.5 billion invested in 709 deals in 2007.

Most notably, the biopharmaceuticals sector saw annual investment slip to its lowest point since 2003 with $4.2 billion put into 289 deals, 29% below the record $5.9 billion put into 351 similar deals in 2007. The fourth quarter of 2008 saw just $707 million put into 68 deals, down 53% from the $1.5 billion invested in 97 deals during the same time in 2007.

Energy Investment Hits Record, Outpaces Business & Financial Services

According to the data, 2008 proved to be a very good year for the energy and utilities industry, as it saw annual investment more than double to a record of nearly $3.6 billion put into 124 deals from $1.7 billion in 101 deals in 2007. Eighty-six renewable energy deals accounted for 86%, or $3.1 billion, of the industry’s annual investment total.

“By championing renewable and clean energy technologies, venture capitalists are once again proving to be primary drivers of innovation in the U.S.,” said Ms. Canning. “With the incoming presidential administration’s stated commitment to improving the country’s energy infrastructure and developing renewable resources, venture-backed companies and their investors are well positioned to benefit from new policy initiatives and changing consumer sentiment.”

For the first time, annual investment in the energy and utilities industry out-paced that of the business & financial services industry, which saw investment slip 17% to nearly $2.9 billion in 321 deals in 2008 from $3.5 billion in 362 deals in 2007. Like health care and IT, business & financial services had a poor fourth quarter with just $374 million invested in 63 deals, down 49% from $733 million put into 97 deals during the last quarter of 2007 and the industry’s worst quarterly showing since early 2004.

According to the data, consumer services saw a resurgence in investor interest in 2008 as the industry attracted $1.3 billion in 99 deals, up 58% from the $822 million invested in 102 similar deals in 2007. The fourth quarter of 2008 saw investment in the sector more than double to $377 million in 17 deals from $142 million in 22 deals during the same time in 2007, but this was because of the $250 million later-stage round for Austin, Tex.-based HomeAway, an online marketplace for vacation rental properties.

The smaller consumer goods industry attracted a record $485 million in 48 deals in 2008, up 31% from $371 million invested in 40 deals in 2007, due in large part to healthy investment in the vehicles and parts sector, which saw $216 million put into 14 deals in 2008.

Deals Shrink Some, Go to Older Companies

Overall, the median round size in 2008 reached $7 million, down from the record $7.4 million seen in 2007, according to VentureSource. Seed-and first-round deals accounted for the largest slice of deal activity with 947 deals, or roughly 38% of the total U.S. deal count for the year, and attracted $5.7 billion in investment. However, later-stage financings attracted far and away the most capital with some $14.4 billion (roughly 51% of all capital invested) put into 901 rounds in 2008.

“While venture investors continued to back emerging start-ups in 2008, they were clearly focusing their money on supporting their existing portfolio companies, a trend we can expect to see until the recession bottoms out,” said Ms. Canning.

Regional Perspectives

According to the report, California was once again the leading destination for venture capital in 2008, accounting for 44% of all deals with 1,121 and 51% of all capital invested with upwards of $14.6 billion. The San Francisco Bay Area attracted the bulk of the state’s venture investment with 848 deals garnering $11.2 billion, up 4% from the $10.8 billion put into 888 deals in 2007 and the region’s highest investment total since 2001.

In other regions, the data showed that:
    —  New England attracted $3.4 billion in venture capital with 328 deals,
        19% less than 2007 when $4.2 billion was put into 377 deals.
    —  For the first time since 2003, Southern California saw its annual
        venture investment fall, down more than 18% to $3.2 billion as the
        region saw only $422 million in investment in the fourth quarter–its
        weakest quarter in more than 5 years.
    —  The New York metropolitan region saw investment climb 11% to roughly $2
        billion in 2008 with 201 deals completed.
    —  Washington State saw venture investment fall below the billion-dollar
        mark for the first time since 2005 with $906 million put into 93 deals,
        down 35% from the $1.4 billion invested in 124 deals in 2007.
    —  Bucking the national trend, Texas recorded its best quarterly investment
        total since 2001 with $505 million garnered in the last quarter of the
        year. Even so, its annual investment total fell 11% to roughly $1.2
        billion in 2008.
    —  Investments in Potomac-area companies fell 9% to $998 million in 84
        deals in 2008 from $1.1 billion in 110 deals in 2007.

The investment figures included in this release are based on aggregate findings of Dow Jones’ proprietary U.S. research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice.

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