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VC Investing Activity Shows Some Gains in Second Quarter, But Still Well Below 2008 Levels

Xconomy National — 

Venture capital invested in U.S. startups during the second quarter was roughly half the amount invested during the same quarter last year, but two venture capital surveys found encouraging signs of improvement from the abysmal first three months of 2009.

VCs put $3.67 billion into 612 deals during the three months that ended June 30, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. That’s down 51 percent from the dollars VCs invested during the same quarter last year, when $7.56 billion went into 1,059 deals nationwide. On the bright side, the capital allocated from April through June represents a 15 percent gain over $3.2 billion invested during the first three months of the year, which hit the lowest level since the first quarter of 1997, according to the MoneyTree Report.

It’s also a less impressive rebound than was suggested in the early read on VC data we got last week from ChubbyBrain.

Q2 VC activity

Q2 VC activity

Dow Jones VentureSource highlighted a similar trend in the VC data it released over the weekend, which shows $5.27 billion was invested in 595 deals during the second quarter. While that’s still dramatically lower than the $8.3 billion that Dow Jones counted in 726 deals during the same quarter last year, it marks a 32 percent improvement over Dow Jones’ numbers for the first quarter. The trends spotlighted by the two reports are often comparable, but Dow Jones and MoneyTree use different methods, sources, and criteria to generate their respective data.

Beyond the broad trends, there are interesting details in both reports. For example:

—VCs invested a total of $1.5 billion in 160 life sciences companies during the second quarter—marking a 47 percent rebound over the prior quarter, according to the MoneyTree Report. “This is the most amount of money we’ve ever seen going into this sector, and considering the environment out there, that is quite a statement,” says Tracy Lefteroff, global managing partner of PricewaterhouseCoopers’ venture capital practice. Dow Jones VentureSource highlights a similar trend in its report, saying, “Health care investment is proving resilient in the downturn and outpaced IT investment for the first time on record. IT investment remains at a 12-year low and the software sector is suffering the worst of it.”

—VC investments in cleantech totaled $274 million going into 42 companies nationwide during the quarter, according to the MoneyTree Report. While that represented a 15 percent increase in dollars over the prior quarter, it was less than a third of the $910.8 million that went into 71 cleantech deals during the same quarter last year. “I think the capital intensity of cleantech is becoming apparent to many people,” says longtime Venrock partner Ray Rothrock. Plans by the federal government to allocate billions of dollars in grants for renewable energy technologies also may be putting a damper on private venture investments, he says.

—During a conference call with reporters, Rothrock also noted that IT startups developing software and Internet-based technologies that enable big enterprises to save money are getting a lot of VC attention. “In terms of IT, virtual anything” is hot, Rothrock says. “Virtual desktops, virtual service, virtual management… It’s all about cost reduction at the enterprise level. There are not many new markets being created. It’s all about reducing costs at the enterprise.”

—Despite the encouraging signs, experts say the venture industry will remain in the horse latitudes until the IPO market recovers—giving venture firms an outlet for the investments they have accumulating in existing companies in their portfolios. According to Dow Jones, the median deal size fell to $5 million in the second quarter, down from a median of $8 million seen a year ago—and a 10-year low.

VC observers are saying that venture activity has been reset to mid-1990 levels. The big question now is whether that’s temporary or longer-lasting. As NVCA president Mark Heesen put it, “We continue to engage in a healthy debate as to the right level of funding for our industry…”