Jul. 29–Venture capital investing inched up 6 percent nationally to $4.3 billion in the second quarter, from $4 billion in the first three months of the year, marking the first quarter-to-quarterincrease in venture funding in three years, according to a survey that will be released today.
But investment in New England companies tumbled 34 percent to $496 million in the April-to-June period from $748.2 million in the first quarter. Seventy-three New England companies won funding in the second quarter, down from 95 the prior quarter.
The MoneyTree survey, prepared by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association, found that 669 US companies received funding in the three months ended June 30, up from 647 companies in the prior period, with more funding going to early-stage companies and to those in software and life sciences.
Todd Dagres, general partner of Battery Ventures in Wellesley, said he was surprised by the New England results.
“You might say we’re lagging the recovery,” he said. “New England is still feeling like it’s not a great time to put money out.”
Venture professionals interpret the overall second-quarter numbers cautiously, noting they followed a quarter when the market was weighed down by concerns over the war in Iraq.
Total venture outlays were 28 percent lower than they were in the second quarter last year, when 826 companies drew $5.9 billion in funding. But the increase over this year’s first quarter ended a slide of 12 consecutive quarters of declining investments since venture funding peaked in the first quarter of 2000, when 2,164 companies commanded $28.6 billion.
“While these numbers don’t show a clear up trend, they’ve definitely stopped falling,” said Jesse Reyes, vice president of Thomson Venture Economics.
The second-quarter numbers reinforce a growing consensus that venture outlays may be stabilizing at an annual range of $10 billion to $20 billion, down from $106.2 billion in 2000 to a level more sustainable and more in line with historic norms.
Venture firms have invested slowly over the past several quarters because nobody wanted to put out money “when the knife is falling,” suggested Dagres. Now, he said, “enough people believe that the knife has stuck in the ground, that we’ve hit bottom … The entrepreneurs sense that, and they’re coming out of the weeds to start companies again.”
Early-stage funding jumped to $956 million in the second quarter, from $668 in the first quarter, reflecting confidence in a new class of start-ups.
“What we’ll see over the next few quarters is a rebalancing of the mix between the established companies and the new companies just getting going,” predicted John Taylor, vice president of research at the National Venture Capital Association.
Later-stage companies have claimed the bulk of venture dollars in recent quarters.
With the exception of networking, where funding fell 7 percent to $427 million, and semiconductors, where funding was essentially flat at $268 million, second-quarter investments rose from the prior quarter in nearly all core industry categories. Software funding climbed 7 percent to $864 million, biotechnology 14 percent to $639 million, telecommunications 21 percent to $615 million, and medical devices 54 percent to $437 million.
“Some sense of normalcy seems to be returning to the industry rankings,” with the leading industries getting the most funding, noted Tracey Lefteroff, the PricewaterhouseCoopers global managing partner of private equity and venture capital.
One hundred fifty-three start-ups received venture capital for the first time in the three months ended June 30, up from an eight-year low of 138 in the first quarter. Fifteen medical device companies and a dozen media and entertainment companies attracted second-quarter funding compared with only two networking companies.
Heidi Roizen, managing director of Mobius Venture Capital in Palo Alto, Calif., said the new crop of entrepreneurs is passionate about building companies and less focused on tapping the equity markets through initial public offerings, which have slowed to a crawl.
“For us,” Roizen said, “it looks very much like venture capital as usual — if you forget the unusual conditions of the last couple of years.”
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