Venture Funding in U.S. Is Up, but Probably Not for Long

Last Updated Jul 16, 2010 1:32 PM EDT

PricewaterhouseCoopers and the National Venture Capital Association released their quarterly MoneyTree report, which shows that VC funding last quarter was up considerably in the U.S. from the same time in 2009. Money increased by 52.6 percent and the number of deals grew by 28.5 percent -- more deals and even more money per deal. An improvement? Yes. Good news? Not really. Venture activity in the US hasn't come close to recovering to pre-2009 levels, high tech companies face deals for less money, and the VC industry is likely to shrink domestically and in Europe, moving to emerging markets, instead.

Look at the first six months of 2010 in the MoneyTree report, and the run rate for both money and deals would be roughly equivalent to 2005. Furthermore, in high tech, at least, results were mixed:

The Software industry had the most deals completed in Q2 with 229 rounds, representing a jump of 43 percent from the 160 rounds completed in the first quarter. In terms of dollars invested, the Software sector was in third place, increasing 43 percent from the prior quarter to $1.0 billion in the second quarter of 2010.Internet-specific companies received $879 million going into 212 deals in the second quarter, flat in terms of dollars and a 25 percent increase in deals over the first quarter of 2010 when $891 million went into 169 deals. 'Internet-Specific' is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company's primary industry category.
In other words, software companies got roughly the same per deal as in 2009, which was a dog of an investment year. Internet companies got less per deal. The semiconductor industry saw a drop in dollars of 40 percent; telecommunications was down by 27 percent.

However, these may yet become the gravy days, at least in hindsight. According to a global survey of VC firms, again involving the National Venture Capital Association, but this time with Deloitte, those in the business expect the number of U.S. and European VC firms to drop over time. Instead, VC firms and limited partners -- the people who put in all the cash -- are looking to China, India, and Brazil, as you can see in the following graphs:

The telltale sign? When you look at the factors that help create favorable venture investment climates, the United States can't get half or more of the people polled to agree that the country has even one of them.

Over the next five years, we may actually begin to see a reversal of a trend so long-standing that people have come to take it as a given. Instead of the best and brightest coming to the U.S. to build their businesses, inventive and ambitious people may leave this country to pursue their interests elsewhere.

Image: user melodi2, site standard license.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.