First Quarter Venture Investments Plunge 50 Percent Nationwide

BY Bruce V. Bigelow

There was a time when venture capital partners used to tell me that venture investing is unaffected by the overall economy, because it takes five to 10 years to realize returns in startup investments. In January 2008, Deepak Kamra of Menlo Park, CA-based Canaan Partners said, “Most venture-backed companies don’t have a lot of debt, so they’re not really directly affected by the credit crunch.”

Nobody’s saying that anymore.

As expected, just-released data from two surveys shows that venture investments throughout the United States plunged by 50 percent during the first three months of 2009—marking the lowest investment level in at least 11 years.

Venture capitalists invested nearly $3.9 billion nationwide during the first three months of 2009—a 50 percent decline from almost $7.8 billion that was invested during the first quarter of 2008, according to data from Dow Jones VentureSource. The survey counted just 477 deals during the first quarter, compared with 706 deals in same quarter last year. DowJones VentureSource also provided regional data for the quarter in Xconomy’s cities.

—New England venture investments declined by just 15.5 percent, a relatively strong showing compared to the broader trend nationwide. The survey showed $594.4 million was invested in 61 deals during the first quarter of 2009, compared with $703.3 million that went to 83 startups in the same quarter of 2008.

—In San Diego, venture funding collapsed in all sectors except life sciences. The Dow Jones data shows 15 companies getting $194.6 million during the first quarter of 2009, a 34 percent decline. On closer inspection, however, deals involving San Diego life sciences startups accounted for $190.6 million—nearly the entire total! Only one IT deal was reported in San Diego during the quarter, for $4 million.

—Washington state VC investments plunged almost 54 percent in the first quarter, with 22 startups getting $114.6 million. Venture investments remained divided fairly evenly, though, with life sciences getting $33.5 million and IT startups getting $59.5 million.

Retrenching was apparent in the nationwide data across almostevery front, according to the report from Dow Jones Venture Source.
—Venture investments in the IT sector plunged by 52 percent, with 231 venture-backed companies getting a total of almost $1.7 billion, the lowest level for the sector since 1997.
—Healthcare venture funding declined by 34, to $1.35 billion invested in 118 deals, the sector’s lowest level since 2003.
—Energy and utilities, which makes up much of the emerging cleantech sector, saw $189 million going to 15 companies, down 59 percent from the $457 million in 24 deals last year.
—The median deal size shrank to just under $2.5 million, down 73 percent from the $9 million median seen a year ago.

A rival survey also showed a 61 percent decline in venture investments nationwide, although different survey methods resulted in different numbers. In this survey, which was released by the National Venture Capital Association (NVCA) and PricewaterhouseCoopers, based on data from Thomson Reuters, VCs nationwide invested just $3 billion in 549 deals during the first quarter.

One of the sharpest differences the NVCA reported for the quarter was an 84 percent plunge in cleantech investments (Dow Jones cited a 59 percent downturn in “Energy and Utilities), with $154 million going to 33 deals nationwide. The NVCA said that contrasts dramatically with the first quarter of 2008, when $971 million was invested in 67 cleantech deals.

Noubar Afeyan, managing partner and CEO of Cambridge, MA-based Flagship Ventures, suggested the drop was more of a reflection on what was happening in cleantech venture funding in early 2008. “Part of what we’re seeing is the sheer degree of momentum investing, if that term applies to venture capital, happening then,” Afeyan said yesterday. In other words, “Too much money goes into too many deals, and a lot of that money went in expecting a short term pop in terms of market visibility or a buyout.”

Jessica Pasucci, a Dow Jones VentureSource analyst in Southern California, suggested that cleantech numbers also can get distorted because investments in solar and biomass deals tend to be very big. “A couple of deals in a quarter can make a huge difference when they are typically big numbers,” she said.

On a final note, the results between the DowJones VentureSource and NVCA surveys often vary, because each uses different survey methodologies and relies on different business networks to collect their data. But the differences were especially apparent this time among the biggest venture deals reported by each survey. You can see for yourself below.

Top 5 Deals of The Quarter
Dow Jones VentureSource
1) Open Range Communications, Greenwood Village, CO, $100M. Provider of broadband wireless Internet solutions. One Equity Partners.
2) A123 Systems, Watertown, MA, $69M. Manufacturer of rechargeable lithium ion batteries and battery systems. GE Capital, GE Energy Financial Services, Undisclosed investors.
3) Sangart, San Diego, CA, $50M. Developing biological compound from human hemoglobin as an “oxygen therapeutic.” Leucadia National, Individual investors.
4) Ardian, San Francisco, CA, $47M. Developing medical devices for treating hypertension. Advanced Technology Ventures, Emergent Medical Ventures.
5) Victory Pharma, San Diego, CA, $45M. Developing products for treating pain. Medtronic, Morgenthaler, Split Rock Ventures.

Top 5 Deals of The Quarter
NVCA PriceWaterhouseCoopers Thomson Reuters
1) Anacor Pharmaceuticals, Palo Alto, CA, $50M. Developing drugs to treat inflammatory and infectious disease. Aberdare Ventures, Care Capital, Rho Ventures, Venrock Associates, Undisclosed investor.
2) Ardian, Palo Alto, CA, $46.9M. Developing medical device for repairing congestive heart failure. Advanced Technology Ventures, Emergent Medical Ventures, Morgenthaler Ventures, Split Rock Partners, St. Paul Venture Capital, Two undisclosed investors.
3) SFJ Pharmaceuticals, San Francisco, $45M. Operates as a platform that brings U.S. and European drugs to Japan. Abingworth Management, Clarus Ventures.
4) Pathway Medical Technologies, Kirkland, WA, $40.2M. Developing medical devices intended for the treatment of arterial diseases. Forbion Capital Partners, Giza Venture Capital, HLM Venture Parnters, Latterell Venture Partners, Oxford Bioscience Partners, Undisclosed investor.
5) BioVex Group, Woburn, MA, $40M. Developing vaccines for cancer and chronic infectious disease. Credit Agricole Private Equity, Forbion Capital Partners, Harrris & Harris Group, Innoven Partenaires S.A., New Science Ventures, Scottish Equity Partners, Triathlon Medical Ventures.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call 858-202-0492