U.S. Venture Financing Down Slightly in Second Quarter; Solar Energy is One Bright Spot

Reflecting the general economic slowdown, venture investment in U.S. companies decreased moderately in the second quarter of 2008, according to reports released over the weekend by Dow Jones VentureSource, a unit of the financial news giant’s enterprise media group, and by the MoneyTree division of PricewaterhouseCoopers. Total funds shelled out by venture firms in the quarter amounted to $6.64 billion, down 8 percent from the first quarter’s $7.21 billion, and down 12 percent compared to the $7.58 billion that venture-backed companies raised in the second quarter of 2007, according to VentureSource.

But given the fact that 2Q07 was the second-biggest quarter ever recorded for venture investment—and that so many other economic indicators have turned south more severely—this quarter’s totals don’t look so bad.

“While the U.S. investment total is down compared to last year’s impressive second quarter, we still saw steady deal activity and investment in the first half of the year, which is encouraging,” said Dow Jones VentureSource’s director of global research, Jessica Canning, in a statement. Venture capitalists are “focusing on what’s next,” she added, “and that’s reflected in the healthy early stage investment we’re seeing in areas like renewable energy, information services and business support services.”

In fact, energy and utilities startups raised a record $817 million in the second quarter, a 160 percent increase over the 2Q07 figure of $314 million. The three biggest venture rounds of the quarter all went to solar energy companies: Beltsville, MD’s SunEdison ($131 million), Pasadena, CA’s eSolar ($130 million), and Oakland, CA’s BrightSource Energy ($115 million).

Venture investments in information technology companies, by contrast, dropped 26 percent from year-ago levels, from $3.50 billion in 2Q07 to $2.60 billion this quarter—the lowest quarterly total since 2003. Healthcare and life-sciences companies fared almost as badly, with investment declining from $2.53 billion in 2Q07 to $1.98 billion this quarter, a 22 percent drop.

In what may be a reaction to the shortage of exit events for startups—the number of IPOs among venture backed companies declined to zero in the second quarter, as we reported a couple of weeks ago—venture firms seem to be putting more of their money toward later-stage companies that may produce faster payoffs for investors. Some 54 percent of the quarter’s total investments were part of Series B or subsequent rounds.

VentureSource also offered a breakdown of the venture investment data by region. The moderate decline in investment was seen in every major region except the two Washingtons: the Washington, D.C. area actually saw an 11 percent uptick in venture activity, to $268 million, while Washington state recorded a 4 percent increase, to $275 million. San Francisco Bay Area companies, as always, attracted the most venture money overall ($2.17 billion), with Southern California in second place ($868 million) and New England in third ($714 million). We’ll publish separate articles shortly detailing second-quarter venture investment in the Boston and Seattle areas.

“The most encouraging part of this quarter’s report is that early stage investing is holding relatively steady thus far in 2008,” Canning summed up. “It may be harder for entrepreneurial companies to raise venture capital these days but it’s by no means impossible.  Continued early stage deal flow is a good sign that the venture industry is prepared to weather the economic downturn and will continue to back the next wave of disruptive technologies.”

The MoneyTree report, issued by PricewaterhouseCoopers and the National Venture Capital Association using data from Thomson Reuters, reached similar findings, though its numbers varied in minor ways. For example, going by Thomson Reuters’ definition of energy/cleantech firms, the amount of capital raised by that sector was $884 million (VentureSource pegged it at $817 million), up slightly from the first quarter’s $871 million. The MoneyTree report’s overall totals were also somewhat higher than VentureSource’s: VC firms invested $7.4 billion in 990 deals in 2Q08, according to the MoneyTree report, which is almost a billion dollars more than the the figure reported by VentureSource.

But the trend line was the same: VC investments in the second quarter were essentially flat. “Despite the turmoil in the markets, the pace of investing in the first half of 2008 indicates that venture investing is on target to reach the $30 billion level this year, putting it on par with 2007 when $30.7 billion was invested,” Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said in a release accompanying the MoneyTree report. “VCs are continuing to find and fund new deals, and the increase in Later stage investments demonstrates that VCs are committed to funding their portfolio companies until the public markets open up or opportunities for M&A present themselves, allowing them to achieve liquidity.”

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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