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.
However, Taylor said that the industry was still taking on new projects '' and it's consistent with what we've done in recent quarters'', citing the acceptance of 294 business plans for which funding had been provided.
Early-stage investments totaled $1.66 billion for the first quarter, down 17 per cent from the fourth quarter. Early-stage investing activity accounted for 23 per cent of all VC activity for the recent period compared to 26 per cent in the previous period.
As for individual sectors that received VC funding, software seems to have lost favour as compared to biotechnology. The life sciences industry, which includes biotechnology and medical devices startups, got the most money during the quarter, with $2.3 billion into 220 deals. Software followed quite some distance behind, and raised $1.26 billion during the quarter compared to $1.39 billion in the previous quarter.
Internet-specific companies, defined by the report's authors as companies whose business models depend on the Internet, got $1.3 billion during the quarter, up from $1.29 billion in the 2007's first quarter.
Environment-friendly or clean technologies had a mixed quarter in the slowdown, with a 6 per cent drop in VC investments from the last quarter of 2007. However, year-to-year, the sector saw a 51 per cent jump in investments to $625 million from the year-ago quarter. This sector includes companies involved in alternative energy, pollution, recycling and other green technologies.
Also, clean technology also accounted for some of the largest deals in the quarter. Range Fuels Inc., an ethanol production firm in Broomfield, Colorado, raised more than $130 million in financing during the quarter, making it the largest VC deal for the period.
In a sign that concern for the environment is growing, other companies also received appreciable amounts. Suniva Inc., a maker of solar-cell technology from Atlanta, raised $50 million during the quarter. Another solar-power firm, Infinia Corp. of Kennewick, Washington, raised nearly $50 million during the period.