Blogging the Q4 2008 MoneyTree Venture Capital Report: Part One

I have spent most of this morning crunching the numbers the just released (January 24) Q4 Money Tree Report gathered by Thomson Financial and released through PriceWaterhouse Coopers and the NVCA. PriceWaterhouse doesn’t have the report up yet on the official Money Tree site, but you can download it from NVCA here. Charts can be found here.

As you might expect, VC funding for 2008 was way down, for the first time in five years, and Q4 money dried up like a liquor bottle in an AA meeting. But there are some genuine surprises, and I’ll point them out in my analysis after the break.

At the 10,000 foot view, venture capitalists put $28.3 billion dollars into 3,808 deals in 2008, representing an 8% decrease in overall funding and a 4% decrease in deals. Put in the language we all speak, venture capitalists sent about 1 in 20 people packing whom they otherwise might have funded as little as a year ago (that’s not a very sharp decrease in your odds if you’re in the market for venture capital).

All types of venture capital investment across all types of industries saw a decline in 2008, except for:

  • Green industry companies where total funding increased 50% and
  • Seed stage companies.

    The increase in seed stage companies makes a great deal of sense. While those investments carry the highest amount of risk, because the companies technically have little value, VC’s are able to grab a big chunk of the company at sometimes rob-the-train prices.

    By sector

  • Life sciences: 28% of all venture capital flowed into life sciences and medical devices start-ups. VC’s invest $8 billion this year compared to $9.3 billion last year (15% drop) in 853 deals as opposed to 883 deals in Q4 2007. Q4 investment in life sciences and medical devices accounts for most of this drop — Q4 totals dropped 33% from Q4 2007.
  • Software: $4.9 billion in funds invested in 881 companies. Software start-up investment dropped to $1 billion in the fourth quarter, the lowest in ten years.
  • Clean technology: Clean Technology investments rose from 9% of total investments in 2007 to 15% of total investments in 2008. $4.9 billion versus $2.7 billion in 2007 (52% increase) in 277 deals versus 238 deals (16% increase) in 2007. But clean technology also saw a significant drop in funding activity from the third quarter: $1.1 billion in only 71 deals, a 14% drop in dollars and a 19% drop in deals.
  • Internet investment: $4.9 billion (versus $5 billion in 2007) in 851 deals (versus 825 deals in 2007). However, in the fourth quarter, internet-specific investment dropped 26% ($787 million) and the deals dropped 20% (170 deals). Internet start-ups accounted for 17% of the total invested in 2008.
  • Media and entertainment: Good news for filmmakers! Total investment for 2008 was $2 billion (a 3% increase over 2007) in 407 deals (9% increase over 2007).
  • IT: $1.8 billion (17% increase) in 262 deals (16% increase).
  • Telecommunications: $1.7 billion.
  • Semiconductor: $1.7 billion.
  • Seed stage companies: $1.5 billion (versus $1.3 billion in 2007) into 440 companies (versus 450 in 2007).
  • Early stage companies: $5.3 billion (compared to $5.5 billion in 2007) in 1,013 deals (compared to 1,036 deals in 2007).
  • Later stage companies: $10.8 billion into 1,177 deals.
  • Expansion stage companies: $10.6 billion into 1,178 deals. Expansion stage deals, as you can probably guess, went off the cliff in the fourth quarter, decline 25% in dollars and 6% in deals ($2 billion into 257 deals).

    In a separate report released on January 19, Thomson Financial released data about 43 venture capital firms. In the fourth quarter, these 43 firms raised $3.4 billion as opposed to raising $8.4 billion in third quarter 2008.

    The NVCA has this to say about the drop in funding:

    The drop in venture capital fundraising activity in the fourth quarter is not surprising for two reasons. First, the market uncertainty has compelled firms that were planning to raise a fund in late 2008 or early 2009 to hold back on fundraising efforts until economic conditions improve and institutional investors can recommit with confidence. The second and less obvious reason is that many venture capital firms raised money in the last two years and are focused on deploying those funds. With some notable exceptions, we can expect this slower pace to continue well into 2009.

    Now, I’ve been crunching these numbers to get at some takeaways for entrepreneurs, and some of the patterns emerging are interesting. My analysis of these numbers tomorrow.

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