Venture Investing Retreats in Q3, But Booming Software Deals Counter Trend

After advancing for three quarters, venture investing retreated in the third quarter, likely shaken by global financial volatility but also a reflection of a shift to a faster, more capital efficient way to make money.

Quarterly investments totaled $6.95 billion with 876 deals receiving funding, according to the MoneyTree Report issued by PricewaterhouseCoopers and the National Venture Capital Association, based on data by Thomson Reuters, publisher of this blog. This was a 12% decrease in dollars and a 14% drop in deals from the second quarter, though capital allocated was up 31% from a year ago.

Countering the decline was 23% jump in funding to software startups. With $2 billion invested – 29% of the total – the sector generated the highest quarterly investment level in 10 years, or since the fourth quarter of 2001. Software companies can be started for very little cash and the potential for growth is high.

In contrast, 14 of the 17 industry sectors the MoneyTree monitors showed investment declines, including cleantech (down 13%), biotechnology (down 18%) and Internet companies (off 33% after a particularly strong second quarter).

Seed investing tumbled even more dramatically, slumping 56% in dollars and 26% in deals. Only $179 million went to 89 deals, the MoneyTree found. Early stage investing fell less sharply, down 7% in dollars. Together, seed and early stage deals accounted for 49% of quarterly deal volume, compared with 48% in the second quarter. The average seed deal was $2 million, compared to $3.3 million one quarter earlier, the report said.

Software deal size went in the opposite direction. The average software startup received $7.6 million in the three month period, up from $4.9 million a year ago and $6.1 million in the second quarter.

Here are a few more numbers:

  • Biotech investing was $1.08 billion with 96 deals funded;
  • Medical devices and equipment investing was $728 million with 74 deals funded;
  • Cleantech investing was $891 million with 80 deals funded; and
  • Healthcare services investing was $152 million, up 200%, with 11 deals funded.