A third-quarter report on venture capital investments is just a preview of what is in store for venture capital firms and investors.
Venture capital investments in the quarter dropped 7% to $7.1 billion from the end of the second quarter, the largest decline in five years, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on Thomson Reuters data. The investments are 9% less than the year-earlier quarter. The number of deals also dropped, to 907 deals in the quarter ended Sept. 30, down 14% from the second quarter.
Biotech companies ($1.35 billion) and software companies ($1.34 billion) received more capital than any of business in the 17 categories tracked by the survey.
Market conditions are taking their toll. Venture capital firms are spending capital now on companies that in previous years would already have been sold or taken public.
About 77% of the $7.1 billion invested by venture capital firms in the third quarter was on older late and expansion stage companies, noted Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers in San Jose, Calif.
Much of the spending on older companies is the result of the lack of liquidity in the public markets and slow mergers-and-acquisitions activity.
John Taylor, NVCA vice president in Washington, compared the situation in the venture capital industry right now to a high school without a diploma printing press. The seniors are all able and waiting but they cant graduate, and each year more seniors are added to the group that cant graduate.
There has been only one IPO of a venture-capital-backed company since March, noted Mark Heesen, NVCA president. So far this year, there have been six venture-backed company IPOs, the lowest number for the first three quarters of a year since 1977, according to NVCA and Thomson Reuters data released earlier this month. Mergers and acquisitions are also way down, with 58 deals in the third quarter, down from 71 in the second quarter and 102 in the year-earlier quarter.
Added Mr. Heesen: The exit market is essentially closed and is not likely to open again any time soon.
Were seeing a lot of companies that should be out of the nest by now still being worked on by venture capitalists, Mr. Heesen said.
But Mr. Taylor cautioned not to place too much emphasis on the softness in the third quarter because the third quarter is historically slow, he said. One quarter does not a trend make, he said.
The credit crisis and market turmoil have made finding capital a big issue. Many venture capital investors are overallocated to the asset class because the value of their public stock portfolios dropped, said Jim Healy, general partner, Sofinnova Ventures Inc. San Francisco. As a result, investors are making few commitments to venture capital funds. And debt to keep portfolio companies going is getting much more expensive, he said.