Venture firms doled out $3 billion to 549 portfolio companies in the first quarter of the year, a 61 percent drop in total dollars and a 45 percent decrease in deals, according to the latest Money Tree report. That’s the least amount of funding offered since the first quarter of 1997, right before the venture field became utterly inundated with dot-com dollars. It was also the fewest number of deals done in a quarter since 1995, according to the report from PricewaterhouseCoopers and the National Venture Capital Association and based on data provided by Thomson Reuters.
The NVCA blames the dive on the economy and expects a steady increase in investment dollars going into companies during the rest of this year, but it’s possible that the economy has exacerbated the cracks that have been weakening the venture model since so much capital poured in during the bubble years. Some have argued that venture firms should be pouring between $10 billion and $15 billion into startups each year, not the annual average of $26.51 billion invested over the last five years, or last year’s total of $28.3 billion.
If the industry does return to investing in startups like it’s 1995, startups in networking and equipment, healthcare services and IT services saw the least percentage drop in the number of deals done from the same quarter a year ago, signaling that those sectors might be less immune to a retrenchment in venture capital.
But it’s looking especially bad for early-stage companies, with only $900 million invested in early-stage deals this quarter, and the rest going to follow-on rounds and later-stage deals. In the last year, almost three-quarters of the total capital has gone into later stage-deals as VCs continue to fund their older portfolio companies while they wait for an exit. That’s been a theme for a while in the venture world, which leaves a lot of VC portfolios in a type of limbo, where they can’t take on new companies, but can’t get out of their older ones.