Q4 2009 Venture Investment Offers Promise for 2010

January 22, 2010

Venture capitalists invested $17.7 billion in 2,795 deals in 2009, marking the lowest level of dollar investment since 1997, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA). Venture investments in 2009 represented a 37 percent decrease in dollars and a 30 percent decrease in deal volume from 2008. It was the second consecutive year of annual deal and dollar declines. Investments in the fourth quarter of 2009 totaled $5.0 billion in 794 deals, a 2 percent decline in dollars but a 15 percent increase in deals from the third quarter of 2009 when $5.1 billion went into 689 deals.

Double digit declines in investments were spread across almost every industry including Clean Technology, Life Sciences and Software. Investment dollars also fell across every stage of development category, with the exception of a 2 percent increase in Seed Stage investments. First-time financings fell to the lowest dollar and deal level since the MoneyTree began reporting venture capital investing in 1995. However, fourth quarter investing did show increases in the number of first-time and Early Stage deals completed, potentially marking the beginning of an uptick in investment levels for 2010.

"The venture capital industry had no choice but to slow the investment pace in 2009," said Mark Heesen, president of the NVCA. "The weak exit environment resulting from an unstable public market combined with a challenged limited partner base sent a strong message to the venture community to pull back the reins -- and the VCs listened. Now that the economy has begun to show signs of improvement, we expect to see dollars flow more freely back into those sectors that offered the most promise before the recession began -- clean technology, life sciences and IT. The Seed and Early Stage pipeline needs replenishing across all industries and the health of the start-up community in the next decade will be dependent upon more robust first-time financings. Twenty-ten should be the year to begin that process in earnest."

"Despite the overall drop in funding in 2009, VCs placed more bets in the fourth quarter of 2009 than we've seen all year," noted Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers LLP. "They're investing fewer dollars in these companies but the fact remains that there are still entrepreneurs out there with great ideas who are getting the opportunity to take the next step forward with their businesses. This can be clearly seen by the increase in the number of Seed Stage companies receiving funding in 2009, compared to those in the Expansion and Later Stages of development, which dropped by close to half. VCs continue to place their bets in areas of promising growth especially in the Life Sciences sector, which accounted for one-fourth of all deals in the fourth quarter of 2009."

Sector and Industry Analysis

While Biotechnology investing declined in 2009 by 19 percent in both dollars and deals, it did become the single largest investment sector for the year in terms of dollars with $3.5 billion going into 406 deals. For the fourth quarter, Biotechnology investing increased 10 percent in dollars and fell 4 percent in the number of deals from the third quarter with $1.0 billion going into 108 rounds. Biotech was also the number one sector for dollars invested in Q4 and the only industry sector receiving more than $1 billion in the fourth quarter. The Medical Device sector fell 27 percent in dollars and 19 percent in deals in 2009, finishing the year as the third largest sector with $2.5 billion going into 309 deals. For the fourth quarter, Medical Devices saw an increase of 13 percent in dollars and 18 percent in deals from Q3 09 with $719 million going into 87 deals. The Life Sciences sector (Biotech and Medical Devices combined) accounted for 34 percent of all venture capital dollars invested in 2009 compared to 28 percent in 2008.

Software investing increased in the fourth quarter of 2009 to the highest quarterly deal and dollar level for the year with $959 million going into 177 deals. For the full year, venture capitalists invested $3.1 billion into 619 deals, a 40 percent decline in dollars and a 35 percent decline in deals from 2008 when $5.1 billion went into 948 deals. For the year, Software remained the largest single industry category in terms of deal volume and second largest behind Biotechnology in terms of dollars.

The Clean Technology sector experienced a significant decline in 2009 with $1.9 billion invested in 185 deals. This investment level represents a 52 percent decrease in dollars and a 31 percent decline in deal volume from 2008 when $4.0 billion was invested in 268 deals. Clean Technology investing accounted for 11 percent of all venture capital dollars in 2009 compared to 14 percent in 2008. In the fourth quarter, venture capitalists invested $385 million into 47 Clean Tech deals, a 58 percent drop in dollars and 13 percent drop in deals from the third quarter of 2009 when $926 million went into 54 deals. Clean Technology crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation.

Internet-specific companies also saw a decline in investing in 2009. The $2.9 billion going into 629 deals in 2009 represented a decline of 39 percent in dollars and 30 percent in deals from 2008 when $4.8 billion went into 902 companies. For the fourth quarter, Internet-specific investment increased 20 percent in deals and 14 percent in dollars with $908 million going into 187 deals compared to $795 million going into 156 deals in the third quarter of 2009. 'Internet-specific' is a discrete classification assigned to a company whose business model is fundamentally dependent on the Internet, regardless of the company's primary industry category. These companies accounted for 17 percent of all venture capital dollars in 2009, approximately the same percentage as in 2008.

With the lone exception of Networking and Equipment, which experienced a 5 percent decline in dollars in 2009, every industry category had double digit declines for the year. Industry sectors experiencing the biggest dollar declines in 2009 included: Telecommunications (-67 percent); Semiconductors (-53%); and Industrial/Energy (-50 percent). The Media & Entertainment industry decreased 32 percent in terms of dollars and 38 percent in terms of deals with $1.2 billion going into 251 deals in 2009. Despite annual declines, 11 out of 17 industry sectors experienced fourth quarter increases in dollar investing.

Stage of Development

Investments into Seed Stage companies increased 2 percent in terms of dollars but fell 37 percent in terms of deals with $1.7 billion going into 312 companies in 2009. For the fourth quarter, venture capitalists invested $390 million into 91 Seed Stage companies, an 18 percent decrease in dollars and a 2 percent increase in deals compared to the third quarter of the year. Seed Stage companies attracted 9 percent of dollars and 11 percent of deals in 2009 compared to 6 percent of dollars and 12 percent of deals in 2008.

Early Stage investments fell by 13 percent in terms of dollars and 17 percent in terms of deals in 2009 to $4.6 billion into 883 deals. However, for the fourth quarter, Early Stage deals experienced double digit increases with $1.6 billion going into 277 deals, a 32 percent increase in dollars and 26 percent increase in deals from Q3. Early Stage companies attracted 26 percent of dollars and 32 percent of deals in 2009 compared to 19 percent of dollars and 27 percent of deals in 2008.

Expansion Stage investments decreased in 2009 by 47 percent in dollars and 35 percent in deals with $5.5 billion going into 801 deals. Expansion funding declined in terms of dollars in the fourth quarter, dropping 6 percent from the prior quarter to $1.6 billion. The number of deals, however, increased during the quarter, improving 19 percent to 234. Expansion Stage companies attracted 31 percent of dollars and 29 percent of deals in 2009 compared to 37 percent of dollars and 31 percent of deals in 2008.

In 2009, $5.9 billion was invested into 799 Later Stage deals, a decline of 44 percent and 33 percent, respectively, for the year. For the fourth quarter, $1.5 billion went into 192 deals, which represents a 5 percent increase in terms of deals but a 16 percent decline in terms of dollars from the third quarter of 2008. Later Stage companies attracted 33 percent of dollars and 29 percent of deals in 2009 compared to 38 percent of dollars and 30 percent of deals in 2008.

First-Time Financings

First-time financings fell to the lowest annual levels since the MoneyTree began reporting in 1995. Just $3.4 billion went into 725 deals in 2009, a 45 percent decline in dollars and a 40 percent decline in deals. However, the dollar level and number of companies receiving venture capital for the first time increased in the fourth quarter by 51 and 37 percent, respectively, over the third quarter to $1.1 billion into 230 companies. This quarter was the first in 2009 in which first-time financings exceeded one billion dollars.

Industries receiving the most dollars in first-time financings in 2009 were Biotechnology, Industrial/Energy and Software. Industries with the most first-time deals in 2009 were Software, Media/Entertainment, and Biotechnology.

Forty-seven percent of first-time deals in 2009 were in the Early Stage of development followed by the Seed Stage of development at 26 percent, Expansion Stage companies at 17 percent and Later Stage companies at 10 percent.