SAN FRANCISCO and NEW YORK, July 18 /PRNewswire/ -- After a sizable decline in the first quarter of 2009, the U.S. venture capital industry showed signs of recovery in the second quarter as venture capitalists invested $5.27 billion in 595 deals, according to new data from industry tracker Dow Jones VentureSource.
While still dramatically lower than the $8.33 billion put into 726 deals during the second quarter of last year, this marks a 32% improvement over the first quarter of 2009, which saw the lowest quarterly investment since 1998 with $4.00 billion invested.
"As the venture capital industry's rebound gains traction, we're seeing a new landscape emerge," said Jessica Canning, Director of Global Research for Dow Jones VentureSource. "Investors are diversifying their portfolios away from traditional investment areas like biopharmaceuticals and software toward segments like medical devices and information services while also pulling back on how much they are willing to invest in each deal."
Health Care Investment Outpaces IT for First Time
According to VentureSource, the Health Care industry saw $2.23 billion invested in 184 deals completed in the second quarter of 2009, a 14% decline from a year ago when $2.60 billion was put into the same number of deals. This marks the first time on record that health care investment outpaced investment in Information Technology, which attracted $1.88 billion in the second quarter.
"Health care investment was the only sector to spring back to levels seen before the economic meltdown that began in the third quarter of 2008," said Ms. Canning. "The recovery in the biopharmaceutical and medical device sectors is driving the rebound in overall venture investments this quarter."
By sector, biopharmaceutical investment slipped 14% from $1.42 billion in 85 deals in the second quarter of 2008 to $1.22 billion put into 71 deals in the most recent quarter. Investment in medical device companies fell 26% from the $1.04 billion put into 77 deals last year to $766 million invested in 79 deals in the most recent quarter. These declines were offset somewhat by a strong quarter in the health care services sector, in which investment nearly tripled from a year ago to $145 million.
IT Industry Continues to Suffer
For the second consecutive quarter, investment in the Information Technology (IT) industry remained at lows unseen since before the tech boom of the late nineties. The $1.88 billion invested in the second quarter of 2009 is a small improvement over the first quarter but still on par with levels seen in 1997. The 248 IT deals are on par with 1995 though, again, slightly better than the first quarter of this year. In comparison, the second quarter of 2008 saw $3.21 billion invested in 338 IT deals.
"For the past six years, software investment has averaged just under $1.5 billion each quarter but that figure has been cut in half in the first two quarters of this year," said Ms. Canning.
According to VentureSource, the U.S. software sector saw $696 million invested in 115 deals during the second quarter, a 52% decline from the $1.42 billion invested in 171 deals during the same period last year and the sector's lowest quarterly investment total since 1997 and smallest deal count since 1995.
The information services sector, which includes most of today's Web 2.0 companies, saw investment of $572 million in 69 deals during the second quarter, down 29% from $800 million invested in 94 deals a year ago.
Energy Investment Down Considerably As Well
The Energy & Utilities industry garnered $317 million in 29 deals during the second quarter, down 70% from the $1.07 billion it saw invested in 37 deals last year. Investment in the renewable energy sector, which makes up the backbone of the industry-spanning "cleantech" category, fell substantially with just $221 million invested in 16 deals in the quarter, a 75% decline from the $897 million invested in 30 similar deals in the same quarter last year.
Elsewhere, the Business and Financial Services industry attracted $547 million in 69 venture deals during the recent quarter, down 38% from the $881 million invested in 93 deals last year. The Consumer Services industry saw $80 million put into 22 deals in the second quarter, down 65% compared to a year ago. The Consumer Goods industry attracted $96 million in venture capital while the Industrial Goods & Materials industry garnered $86 million.
Corporations Investing In Lieu of Buying
Corporations may not be making many large acquisitions these days but they returned to venture investing in a big way in the second quarter of 2009.
"As venture investors are forced to hold on to companies for longer periods of time, corporations are beginning to step in to help carry these companies down the last stretch to exits," added Ms. Canning.
According to VentureSource, the second quarter saw venture-backed companies raise 10 corporate rounds and garner $401 million in financing, the most since 2000. Even excluding the $200 million round raised by social network Facebook -- the largest investment round of the quarter -- the remaining $201 million still marks the most capital raised by venture-backed companies from corporations since 2003.
The Deals Get Smaller & The Companies Get Older
The data shows that the median deal size fell to $5 million in the second quarter, down from the $8-million median seen a year ago and the lowest median deal size since 1999.
Later-stage financing rounds accounted for 53% of all venture investment in the second quarter of 2009, up from 51% in the same quarter last year. The proportion of seed and first-round investment was 19%, down from 21% in the second quarter last year. The proportion of investment going to second rounds rose to 25% in the most recent quarter from 23% last year. Recapitalizations accounted for roughly 3% of investments in the second quarter of 2009, down from 5% in 2008.
Regional Perspectives
As usual, California dominated venture capital activity in the second quarter, representing 42% of the nation's deal flow and 46% of the capital invested. By major region, the VentureSource data showed that:
-- Investment in the San Francisco Bay Area fell 41% to $1.83 billion with 180 deals completed -- on par with levels seen in 2005. -- New England garnered $640 million in 85 deals, a 39% decline from investment in the region during the second quarter of 2008. -- Venture capitalists invested 59% less capital in Southern California during the second quarter with $433 million put into 62 deals. -- The New York Metro region attracted $372 million in 44 deals, down 12% from a year ago. -- Investors put a record $296 million into 14 deals in Colorado during the second quarter. -- Investment in Washington slipped just 2% in the quarter to $272 million with 40 deals completed. -- With nine venture deals, North Carolina's Research Triangle received $101 million in venture financing in the quarter, 12% less than during the same period last year. -- The Potomac region attracted 69% less capital in the second quarter with $81 million going into 17 deals. -- Texas garnered $73 million in venture capital with 19 deals done, off 53% from a year ago.
For more information, journalists can contact Adam Wade at 415-439-6666 or adam.wade@dowjones.com, or follow the story at http://www.twitter.com/djventurewire. For general information about VentureSource, visit http://venturecapital.dowjones.com/.
The investment figures included in this release are based on aggregate findings of Dow Jones proprietary U.S. research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice. Copyright 2009 Dow Jones VentureSource
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