VC investments slow down in 2008

The global credit crunch and woes in the sub-prime mortgage market are making it more difficult for companies seeking funds from venture capitalists, who have been scaling back their investments against a backdrop of continuing signs of an economic slowdown.

With total losses from the current crisis pegged as high as $1 trillion, venture capitalists, who traditionally used  merger and acquisitions or the initial public offering to cash in on their investments are now treading this route with extreme caution; there have been only five such IPOs this quarter compared to 18 companies having been taken public in the first quarter of 2007.

According to the latest quarterly report from Money Tree, compiled by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) based on data by Thomson Financial, venture capital investing in the first quarter of 2008 declined to about $7.1 billion, down 5.6 per cent from the $7.8 billion raised in the fourth quarter of 2007 and a 7.6 per cent fall from the $7.5 billion raised in the first quarter of 2007.

However, things are not so bad as they seem. Despite the decline, the 2008 first quarter saw the fifth-highest level of investment for the period since 2001. Also, the number of deals invested in actually increased year-on-year, from 861 to 922.

NVCA president Mark Heesen also struck a positive note saying no significant declines in investment levels were expected in the coming year. However, he added that more venture capital money could go into late-stage companies if the market for initial public offerings remains weak. John Taylor, vice president of research for the NVCA, said VCs remain interested in new projects "albeit with a sense of caution."

As in previous slowdowns, venture capitalists seem to prefer companies were they already have established relationships, or made previous investments. Companies that have not received venture capital funding in the past saw a decline in activity during the first quarter. First-stage financings totaled $1.64 billion during the quarter, down 27 per cent from the $2.24 billion in first-time deals in the fourth quarter and down 4 per cent from the $1.7 billion in first time deals for the first quarter of last year.