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U.S. VC investment picks up in Q2

Monday, July 20, 2009

The Business Review ( Albany )

After a sizable decline in the first quarter of 2009, the U.S. venture capital industry showed signs of recovery in the second quarter as venture capitalists invested $5.27 billion in 595 deals, according to a report from Dow Jones VentureSource.

While still dramatically lower than the $8.33 billion put into 726 deals during the second quarter of last year, this marks a 32 percent improvement over the first quarter of 2009, which saw the lowest quarterly investment since 1998 with $4.00 billion invested.

"As the venture capital industry's rebound gains traction, we're seeing a new landscape emerge," said Jessica Canning, director of global research for Dow Jones VentureSource. "Investors are diversifying their portfolios away from traditional investment areas like biopharmaceuticals and software toward segments like medical devices and information services while also pulling back on how much they are willing to invest in each deal."

The health care industry saw $2.23 billion invested in 184 deals completed in the second quarter of 2009, a 14 percent decline from a year ago when $2.60 billion was put into the same number of deals. This marks the first time on record that health care investment outpaced investment in Information Technology, which attracted $1.88 billion in the second quarter.

By sector, biopharmaceutical investment slipped 14 percent from $1.42 billion in 85 deals in the second quarter of 2008 to $1.22 billion put into 71 deals in the most recent quarter. Investment in medical device companies fell 26 percent from the $1.04 billion put into 77 deals last year to $766 million invested in 79 deals in the most recent quarter. These declines were offset somewhat by a strong quarter in the health care services sector, in which investment nearly tripled from a year ago to $145 million.

For the second consecutive quarter, investment in the information technology industry remained at lows unseen since before the tech boom of the late nineties. The $1.88 billion invested in the second quarter of 2009 is a small improvement over the first quarter but still on par with levels seen in 1997. The 248 IT deals are on par with 1995 though, again, slightly better than the first quarter of this year. In comparison, the second quarter of 2008 saw $3.21 billion invested in 338 IT deals.

According to VentureSource, the U.S. software sector saw $696 million invested in 115 deals during the second quarter, a 52 percent decline from the $1.42 billion invested in 171 deals during the same period last year and the sector's lowest quarterly investment total since 1997 and smallest deal count since 1995.

The information services sector, which includes most of today's Web 2.0 companies, saw investment of $572 million in 69 deals during the second quarter, down 29 percent from $800 million invested in 94 deals a year ago.

The energy & utilities industry garnered $317 million in 29 deals during the second quarter, down 70 percent from the $1.07 billion it saw invested in 37 deals last year. Investment in the renewable energy sector, which makes up the backbone of the industry-spanning cleantech category, fell substantially with just $221 million invested in 16 deals in the quarter, a 75% decline from the $897 million invested in 30 similar deals in the same quarter last year.

Elsewhere, the business and financial services industry attracted $547 million in 69 venture deals during the recent quarter, down 38 percent from the $881 million invested in 93 deals last year. The consumer services industry saw $80 million put into 22 deals in the second quarter, down 65 percent compared to a year ago. The consumer goods industry attracted $96 million in venture capital while the industrial goods & materials industry garnered $86 million.

Corporations may not be making many large acquisitions these days but they returned to venture investing in a big way in the second quarter of 2009.

According to VentureSource, the second quarter saw venture-backed companies raise 10 corporate rounds and garner $401 million in financing, the most since 2000. Even excluding the $200 million round raised by Palo Alto, Calif.-based Facebook Inc. -- the largest investment round of the quarter -- the remaining $201 million still marks the most capital raised by venture-backed companies from corporations since 2003.

The data shows that the median deal size fell to $5 million in the second quarter, down from the $8-million median seen a year ago and the lowest median deal size since 1999.

Later-stage financing rounds accounted for 53 percent of all venture investment in the second quarter of 2009, up from 51 percent in the same quarter last year. The proportion of seed and first-round investment was 19 percent, down from 21 percent in the second quarter last year. The proportion of investment going to second rounds rose to 25 percent in the most recent quarter from 23 percent last year. Recapitalizations accounted for roughly 3 percent of investments in the second quarter of 2009, down from 5 percent in 2008.

As usual, California dominated venture capital activity in the second quarter, representing 42 percent of the nation's deal flow and 46 percent of the capital invested.