U.S. Q4 VC investments join CDN swoon

WSJ News item: Venture Funding Falls 30%:

Venture-capital investment dropped 30% in the fourth quarter to its lowest level since 2005, as the financial crisis threatened to cut off more funding for start-up companies.

In total, $5.5 billion was invested in private companies in the U.S. during the fourth quarter, down from $7.9 billion a year earlier and the lowest quarterly tally since 2005’s first quarter, according to new data from research firm VentureSource. (VentureSource is owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.) Just 554 venture deals were completed in the quarter, down from 718 a year earlier.

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But venture-capital firms are pulling back now as the economy struggles to get back on track. “Very few new deals are getting done, and a lot of people are trying to make sure their portfolios are protected,” says Faysal Sohail, a venture capitalist at CMEA Ventures in San Francisco, who says his firm has slowed its investment pace.

The venture business has been hit hard because the sector’s routes to returns — initial public offerings of shares and mergers-and-acquisitions activity — have been all but shut down by the market’s gyrations. In addition, some institutional investors have become gun-shy about investing in venture capital amid the downturn.

In particular, technology start-ups had their worst investment quarter since 1998, with just $2.2 billion invested in 266 tech-venture deals in the fourth quarter, off 39% from the $3.6 billion invested in the year-earlier period, according to VentureSource. Within the tech sector, investment in software start-ups fell to the lowest level since the first quarter of 1997.

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For all of 2008, there were 2,550 venture deals totaling $28.8 billion in investments, down from 2,823 deals totaling $31.4 billion in investments in 2007, says VentureSource.”

Our DTM friends here at home have finally turned their minds to the impact of technology investing, although it is through this excellent piece on the impact that Nortel’s fall will have on the Canadian Innovation Economy. It was a year ago yesterday that I penned a few ideas to help stem this tide (see prior post “ Solving the Start-up & VC malaise” January 18-08). But it took the entire might of the 1,800 member CVCA to get us some ink.

Just last week, the Canadian Venture Capital and Private Equity Association (CVCA) released its Venture Capital Impact Study. This work product was commissioned to help our policy leaders understand that the Candian economy is more than just natural resources and a branch plant auto industry (report link here).

The Ottawa Citizen was kind enough to cover the release (“Financial crisis has stopped venture capitalists cold“), even if the headline is wrong. The drop in Canadian venture capital preceded the global financial crisis (see prior posts “Deloitte’s study on Canadian VC Crisis is well-timed” December 6-07 and “Brutal venture capital stats for H1 2007 part 3” September 12-07), and is more systemic than it is a knee jerk reaction to the fall of Lehman Brothers.

In related news, the Ontario government’s new $205 million Ontario Venture Capital Fund (see prior post “MRI Fund rumors come true” June 11-08) has made its first general partner commitment. Interestingly, the rumour is that a U.S.-based V.C. firm has the distinction of being the first group chosen to receive capital to help stimulate Ontario’s flagging Innovation Economy.

Unfortunate optics (see prior post “Ontario politicians asked to address deteriorating VC climate part 2” October 26-07).

MRM