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The Lights Are Still On (Think Energy and Biotech Investments), but the Party’s Over for Many U.S. Venture Deals

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hasn’t yet been impacted by the turmoil in the financial markets, as evidenced by the $7 billion plus invested in Q3, we do expect to see a dip in investing over the next several quarters,” said Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, in a statement. “We also do not expect venture funding to dry up. Venture capitalists have slugged through difficult economic times before and this one should be no different.”

In a conference call on Friday, Mark Heesen, president of the National Venture Capital Association (NVCA), ventured his thoughts about the impact of the financial crisis. “We’ve been through this before, and hopefully we’ve learned some lessons from the bursting of the bubble,” he said. “You see concern out there, there’s no question about it…more on the IT side than life sciences. We see companies that should be out of the nest by now being worked on by VCs still.” Another big concern, Heesen says, is “less time and less money going to new ideas, new entrepreneurs, and new companies. The long-term issue is, we want to see entrepreneurs out there. That has very serious implications for the venture capital industry. There are clouds on the horizon.”

While some might consider that an understatement, venture capitalists seem to be standing tall, while employing extra caution in their deal selection when it comes to size and time horizons. “It’s one of the best times to build new companies,” says Faysal Sohail of San Francisco-based CMEA Ventures, which manages $1.3 billion in funds (about half in energy and materials, and the rest in information technology and life sciences). Speaking for his own firm, he says, “Deal flow is incredible…the phone is ringing off the hook. We’re making sure new deals are capital efficient, and we’ll only go in on deals with partners who are able to be at the table with us for three years.”

In the conference call, Sohail emphasized that the venture industry is still thriving. “The strong will survive. This is not a time to panic, there’s lots of opportunity,” he says, pointing particularly to the energy sector. But given the amount of capital and time needed to build cleantech companies, he says, “We’re making sure we have a lot of reserves for those companies. We’re working closely with strategic partners…some of them end customers, allocating our portfolios to those.”

That cautious optimism is echoed by VCs in the life sciences sector, but they acknowledge the inevitable impact of the failing economy. “Current financial markets will have a domino effect on our industry,” said Sofinnova’s Healy in the call. It will be much more difficult for unproven, first-time, or average venture firms to raise new funds.”

So, while the future is cloaked in apprehension, here are the top 10 venture deals of Q3 2008 (according to the MoneyTree and NVCA report):

1. SolarReserve (Santa Monica, CA) $140M
2. AVA Solar (Fort Collins, CO) $104M
3. Pacific Biosciences of California (formerly Nanofluidics) (Menlo Park CA) $100M
4. CVRx (Minneapolis MN) $84M
5. Proteolix (South San Francisco, CA) $79M
6. Recurrent Energy (San Francisco, CA) $75M
7. Trion World Network (Redwood City, CA) $70M
8. Proto Labs (Maple Plain, MN) $67M
9. Fisker Automotive (Irvine, CA) $65M
10. Portola Pharmaceuticals (South San Francisco CA) $60M

It wasn’t immediately clear why neither Seattle-based Big Fish Games’ $83 million venture financing, announced last month, nor San Diego’s The Active Network ($80 million) didn’t make the list. Matthew Toole of Thomson Reuters is supposed to get back to me about it. We’ll also be bringing you regional breakdowns for the individual Xconomy sites soon, so watch this space…

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