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Summary:

As expected, the venture industry is seeing the fallout from the economic crisis, with fourth-quarter investments dropping to a total of $5.4 billion invested in 818 companies, according to a report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters. That’s […]

As expected, the venture industry is seeing the fallout from the economic crisis, with fourth-quarter investments dropping to a total of $5.4 billion invested in 818 companies, according to a report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters. That’s a 33 percent plunge from the $8.09 billion invested in 1,051 companies in the fourth quarter of 2007.

With the exception of a few industries, these fourth-quarter numbers show a sharp pullback by VCs between the third and fourth quarters of 2008. Indeed, VCs are nursing their growing portfolios of later-stage companies that are unable to exit through a public sale or an initial public offering — and waiting for the economic fallout to subside.

As we reported after the third-quarter NVCA conference call, valuations are down for venture-backed companies seeking additional rounds of financing. With exit markets essentially closed, there remains a cluster of later-stage deals cluttering up venture portfolios. Pascal Levensohn, of Levensohn Venture Partners, notes that this is an expecially good time to get a better deal on later-stage companies willing to settle for early-stage valuations. “Capitalization models are out of sync with the reality of the market,” he says.

The MoneyTree data also tries to look on the bright side, noting, for example, that in all of 2008, VCs made the most seed-stage investments since 2000. They put $1.5 billion into 440 companies, compared to $1.3 billion into 450 companies during 2007. However, those seed investments fell along with all the other investments during the last three months of the year, with $199 million going into 62 startups — a 47 percent drop in dollar terms and a 43 percent slide in terms of companies over the fourth quarter of 2007. And the fourth-quarter dive caused 2008 to be the first since 2003 that venture capital investing has declined on an annual basis.

With venture firms pondering their investment strategies, so far startups in the media and entertainment business and cleantech are still seeing a slight increase in deals, making it appear that venture firms are pulling back most strongly from the software, semiconductor and Internet technology sectors.

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By Stacey Higginbotham
  1. Not exactly a cliff.

    2007Q4 was unusually high. 2008Q4 was the EXACT SAME ORDER OF MAGNITUDE as 2002Q4 through 2006Q4.

    Way to sensationalize it!

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  2. Scobleizer — Tech geek blogger » Blog Archive A Tale of Four Venture Backed Companies « Saturday, January 24, 2009

    [...] A Tale of Four Venture Backed Companies You’ve probably seen the nasty headlines over on TechMeme and TechFuga yesterday. You know the ones, like this one about how Venture Capital has dried up. [...]

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  3. [...] surprisingly, venture capital activity in the fourth-quarter plummeted as uncertain economic conditions forced many investors to step a [...]

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  4. @bob

    So i read you right, we should say…. VC funding flat with 2006. When you use the comparable data you use it either year-over-year or sequential quarter numbers. It is standard way of reporting large data sets, and not sensationalizing the information. And yes, it has fallen off the cliff.

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  5. But, ironically, I read a few stories today about Regional venture funding going up in 2008. Particularly “Venture Capital Rises in Michigan in ’08″ http://www.freep.com/article/20090124/BUSINESS06/901240367/Venture+capital+rises+in+Michigan+in++08

    I also saw the ’08 Venture investing went up in Colorado (though Q4 was down).

    Does anyone think there’s any significance?

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  6. @Abigail

    It might be because of a handful of deals that things are getting skewed in Michigan – I am pretty certain it is going to be all around cleantech/new autos and those are big rounds.

    Secondly, Colorado does have a very active investor in Foundry Group. They are helping that region get some zing.

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  7. Stacey Higginbotham Saturday, January 24, 2009

    Bob, looking at the data, this year’s Q4 funding amount is the lowest since 2002. Not sure what you mean by the same order of magnitude, but the fourth quarter fundings this year also contributed less on a percentage basis to the whole year as compared with previous years — both in deals and in terms of dollars.

    Abigail, like Om said, regional numbers may be up as there are generally fewer deals in a region so one big deal can skew the numbers. But glad to see Michigan getting some investment.

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  8. [...] in the last quarter of the year.  Software investments are on top with biotech a close second.  Stacey Higginbotham, our Austin based Gigaom reporter, has the full scoop in a generally depressing look at VC funding [...]

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  9. [...] January 24, 2009 Says GigaOM. [...]

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  10. companies of web2: enjoy your funding, this is the end of it. the VCs haven’t made a dime off of web2 save youtube. four years from now, funding individual websites will seem to make about as much sense as funding individual TV shows. its over, it was a great scam. how many tens of thousands in the bay area alone have made a decent living doing nothing but producing concept work and burning off VC capital? the business cycle of the bay area web startup in 2009 is simple: get funding, spend it all with nothing remotely resembling an exit, repeat.

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