WSJ: Venture Capital Investing Hits 11-Year Low

News that sounds a lot like Canada’s. This from today’s Wall Street Journal:

By Russ Garland

Venture capital investment plunged 50% from a year ago, signaling what could be a fundamental shift in the industry’s size and direction.

Venture-backed companies raised $3.9 billion in the first quarter of this year, down from $7.78 billion in the first quarter of 2008, according to VentureSource, an industry tracker owned by Dow Jones & Co. It was the lowest quarterly investment since 1998. The total fell significantly below the $5.95 billion invested in the fourth quarter of last year when the collapse of Lehman Brothers Holdings Inc. and other economic shocks took their toll on the venture business.

The number of deals also fell sharply to a level not seen since 1996. Only 477 venture-backed companies closed equity financings in the first quarter compared with 706 a year ago and 601 in the fourth quarter of 2008.

Clearly the recession is making VCs more cautious, but pressure on the pension funds, endowments and foundations who finance venture firms is also making itself felt. These limited partners have seen substantial drops in the value of their public and private investments and are reluctant to commit more money to the venture industry, whose performance has been disappointing for nearly a decade.

“LPs are using this to demand a back-to-basics approach,” said Maria Cirino, a co-founder and managing director of .406 Ventures, an early-stage venture firm in Boston. This means smaller funds and investment strategies with tighter focus, she said.

Cirino said .406, which closed its debut fund last year, is seeing strong deal flow and is investing at a slow, steady pace. But venture firms in need of fresh capital, even those accustomed to raising it easily, are meeting LP resistance. New Enterprise Associates has scaled down the target for its latest fund from $3 billion to a range of $2 billion to $2.5 billion, and Oak Investment Partners will be seeking $1.5 billion, $1 billion less than its current fund, LPs say. “I think it’s going to be a long, slow climb for this asset class,” Cirino said.

While leading VCs can still raise capital, many marginal firms are running out of steam. “You have some of the funds that are left over from the last bubble finally going away,” said Deepak Kamra, a Menlo Park, Calif.-based general partner with Canaan Partners.

Even clean technology, one of the few areas where VCs were bullish, stalled. In the first quarter, renewable energy, the sector covering most venture companies working on so-called green technology, registered $117 million invested into nine deals, a 73% decline from the $427 million invested in 16 deals in the first period of 2008. The sector had been strong through the fourth quarter when 26 renewable energy companies raised $790 million.

“We’re still seeing very active deal flow, but I would say that we have slowed our investment pace a little bit,” said Don Wood, a managing director at Menlo Park, Calif.-based Draper Fisher Jurvetson who invests in cleantech. “We’re just watching and evaluating these deals very carefully and have a very high bar.”

Information technology, the mainstay of venture investing, recorded its worst quarter since 1997 with $1.68 billion invested, down 52% from $3.48 billion in the first period of last year. The 231 IT deals in the first quarter was the lowest since 1995.

Health care held up better, with investment at $1.35 billion in the first quarter, down 34% from the first quarter of 2008. The deal total fell to 118, down from 156 in the fourth quarter of 2008 and 162 in the first.

Seed and first-round financing fell sharply to $682 million in the first quarter from $1.83 billion in the same period of 2008. Later-stage rounds accounted for 55% of venture investment in the first quarter as investors looked to provide their portfolio companies with more capital to weather the economic downturn. That later-stage investment percentage sat at about 51% for all of 2008 and 49% for 2007.

Kamra of Canaan Partners said he thinks the deal pace will pick up in the second quarter because company valuations have come down and venture firms with capital to deploy will be turning their attention to new investments. “I think everybody was focused on their existing deals for the last two quarters,” he said.

MRM