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Venture Capital Outlook Good Despite Downturn


However, investments in Internet startups dropped 36%, receiving $1.1 billion for 194 deals versus $1.6 billion for 251 deals in the second quarter.

By W. David Gardner
InformationWeek
October 20, 2008 04:54 PM

In spite of the financial meltdown gripping many U.S. business sectors, venture capitalists are continuing to invest in high-tech startups including software companies, but an investing downturn is expected to show up as financial malaise sets in during the coming months.

That was just one observation in a report released over the weekend by PricewaterhouseCoopers and the National Venture Capital Association. Their MoneyTree Report noted that quarterly investment activity dropped 7% in the third quarter to $7.1 billion from $7.7 billion invested in the second quarter of 2008. Data for the quarterly report was provided by Thomson Reuters.

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Particularly hard hit were investments in Internet startups, which dropped 36%, receiving $1.1 billion for 194 deals versus $1.6 billion for 251 deals in the second quarter. Even so, the quarter marked the ninth consecutive quarter in which more than $1 billion was invested in Internet-specific deals.

While high-tech venture capitalists have been predicting a downward trend in investments in their sector because of the current financial downturn, they have said they believe the sector won't be as hard hit as it was in the late 1990s when high-tech stocks and enthusiasm reached nosebleed highs without commensurate reasons.

"Venture capitalists have slugged through difficult economic times before and this one should be no different," said Tracy T. Lefteroff, global managing partner of PricewaterhouseCoopers' venture capital practice, in a statement. "They are long-term investors and won't jump ship just because the times are tough. They may tighten their belts and those of their portfolio companies but they still have money in their coffers and will continue to make investments."

Deals for software held onto the position as the top deal attractor with 214 companies receiving $1.34 billion in funding. For the first time, the biotech industry nailed down the top position in terms of dollars invested with $1.35 billion, narrowly edging software startup deals.

IT-related startups seem destined to decline in the venture capital listings as biotech and clean energy companies increasingly come to the fore.

"During the next year, venture capital investment levels will be driven significantly by the clean tech sector, which will continue to grow despite economic woes and could become the top investment sector for the venture capital industry by 2012," said Mark Heesen, president of the National Venture Capital Association.


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