In the second quarter of 2008, quarterly venture capital investment in U.S. companies slipped below the $7 billion mark for the first time in 18 months. According to the Quarterly U.S. Venture Capital Report released today by Dow Jones VentureSource (http://www.venturecapital.dowjones.com), investment fell 12% in the second quarter compared to the same period last year with $6.64 billion put into 602 deals, the lowest quarterly deal count since 2005. The $7.58 billion invested in second quarter of 2007 was the second-highest quarterly totals recorded since the end of the dot-com boom in 2001.Yet it's not all bad news because there was " steady deal activity and investment in the first half of the year," according to Dow Jones VentureSource director of global research Jessica Canning. In the quarterly analysis (and the second quarter of 2007 was exceptionally strong), the industry sector results were as follows:
- IT, down 29 percent in the number of deals and 26 percent in investment dollars, the lowest quarterly total since 2003
- within IT, however, information services, including Web 2.0 parlays, had a 20 percent increase in dollars invested, and the average amount per deal was up significantly
- health care dropped 22 percent
- energy and utilities, no surprise with the cost of oil shooting up, rose 160 percent, with almost 80 percent of the money going into renewable energy work
- business and financial services investment was up six percent
- industrial goods and materials up 14 percent
- consumer goods down 24 percent
"The movement of venture dollars from the traditional areas of information technology and health care toward burgeoning sectors like renewable energy, power management, and agriculture -- or 'clean technology' areas -- proves that venture capitalists are making good on their promise to tap opportunities in the massive energy market," said Ms. Canning.VentureBeat compares the report with first quarter numbers from the National Venture Capital Association and PwC. Although the NVCA/PwC MoneyTree Report only has a first quarter summary, VentureBeat seems to have additional data from the organizations in a chart that shows an increase in the total deals and total dollars for the first half of 2008 over 2007 (or 2006, for that matter). It's a case of dueling data, because, according to Dow Jones VentureSource, first quarter investment was $6.84 billion, down seven percent from the same period in 2007, and the number of deals was 603, rather than 628. According to them, the real anvil was healthcare, the only sector the firm found having an overall decline in the period, and IT was up 20 percent in dollars.
So what to make of all this? Aside from there clearly being some big differences in the two sets of counts (I'd love to see a comparison of how they both come up with their figures), I'd consider the following:
- When two firms can't get close on their reports of who invested in what, you have to take everything with a salt shaker at the ready.
- Getting tied up in the minutiae of quarterly counts alone is enough to make you unnecessarily crazy. The question is what are the long term patterns doing. The reports suggest that there is still money being invested.
- It's not surprising that there new and continuing ventures are still getting strong investment, because there is so much money in the world looking for places to park and grow, and the spasms in some of the financial markets mean fewer places the cash can flow.
- There are areas where high tech money seems to be accumulating. Information services is one sector; another is renewable energy. That's not to say that only new businesses in these areas can gain investment, but if you have a variety of potential customer problems to solve, ones that interest the sources of money aren't a bad choice.
- Some people have probably gotten tired of the VC investment success horizon going back to a longer and more normal time frame and want to get in at later stages because they want a faster return on their money. And when they remember that the really big payoff comes from getting into the earlier stages, they'll probably start shifting back.
Update: BNET Financial Services blogger Dan Ackman came to similar conclusions a few weeks ago based on older NVCA data.
Focus on Finance image via morguefile.com user Dani Simmonds, use by permission