Venture capital firms invested more money in fewer transactions in the third quarter compared with the prior quarter, providing a tiny ray of sunshine for the industry.
But the third-quarter investment, while up from the second quarter, also represented a third less capital than was invested during the third quarter of 2008, according to the recently released MoneyTree Report from PricewaterhouseCoopers LLP and the National Venture Capital Association, based on data from Thomson Reuters.
Venture capital firms invested $4.8 billion in 637 transactions in the third quarter, compared with $4.1 billion in 657 deals in the second quarter and $7.2 billion in 994 deals in the third quarter of 2008, the report indicated. The increase in money invested in the latest quarter was because of clean-technology investments, including one that was the largest venture capital deal in the quarter, said Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers LLP, based in San Jose, Calif.
That deal was a $286 million investment in Solyndra Inc., by venture capital firms Argonaut Partners LLC, Redpoint Ventures, Rockport Capital Partners and U.S. Venture Partners. This was the fifth round of venture capital financing injected into Fremont, Calif.-based Solyndra, which designs and manufactures photovoltaic technology for solar energy.
Investing more dollars in fewer deals reflects a move by the venture capital industry toward a “different size band” where deals are getting smaller than one to two years ago, said John S. Taylor, vice president of research of the Washington-based NVCA.
“Firms are focusing on existing mature companies,” he said.
Venture capital firms that were investing during the third quarter tended to stick with companies that had already received rounds of venture capital financing, often existing portfolio companies. The dollar value of investment in first-time transactions — $600 million — was the lowest in the survey history, Elizabeth Benson, head of private equity at Thomson Reuters, said during a conference call Oct. 19. By comparison, first-time financing investments totaled $800 million in the first quarter and $1.5 billion was invested in first-time financings in the third quarter 2008.
Venture capital executives say that investment pace has been slow this year.
Jim Feuille, general partner of venture capital firm Crosslink Capital, San Francisco, said his firm invested in two new deals so far this year with a third in process. He expects the firm might complete up to four deals by the end of the year, compared with eight to 10 transactions in a typical year.
This year, Crosslink, which invests in technology and technology-enabled businesses, poured more money into existing portfolio companies that are doing well, he said.
Overall, investments in clean-tech companies grew 89% to $898 million from the second quarter and the number of clean-tech deals grew 16% to 57 investments.
Even so, solar and wind companies are going through a period of “capital constraint,” said Amir Nashat, general partner in the Boston office of venture capital firm Polaris Venture Partners.
“We are picking winners from one to two years ago,” among companies focusing on solar and wind they think will survive for the long haul, he said. Polaris' investment focus includes the health-care sector and clean technology.
Some 18% of the total funding during the quarter was to companies in the biotechnology industry, which received $905 million in 104 deals. That represented 4% less money into 16% more deals than in the second quarter.
However, Crosslink's Mr. Feuille expects investment to start picking up in 2010. The longer the meltdown, the more confidence investors will have, he said.
Venture capital firms have been slow to invest this year because they were far from certain they could raise fresh capital from investors.
“2009 has been an extremely difficult year for fundraising,” Mr. Feuille said. “The disruption for our LPs (limited partners) has been tremendous. Capital for private equity has been very low in 2009.”
