Boston Blows Northeast Lead in VC Investment, New York Takes Over

7/23/07Follow @bbuderi

It’s bad enough with the real Yankees breathing down the Red Sox’s neck. Now, taking advantage of a nearly 50 percent nosedive in Boston-area venture investing from Q1 to Q2, the Yankees of venture capital have surpassed this region’s VCs in both deals made and dollars invested in the second quarter—becoming, at least temporarily, the Northeast leaders in venture funding. On the national scene, both San Diego and Los Angeles joined perennial frontrunner the Bay Area in outstripping the Boston locale in second-quarter venture investing as well—all this according to the Quarterly Venture Capital Report released today by Ernst & Young and Dow Jones VentureOne. (There’s no link to the data available as I write this, but it should soon be here).

The downturn in Boston deal-making came amid a generally rosy picture for U.S. venture capital. Overall, venture financing climbed 5.5 percent from Q1 to Q2, to $7.4 billion. That’s a spike of 8 percent over the same period last year, the report indicates. The number of deals also rose 8 percent compared to last year, to 717, the most since 2001.

One of the biggest upturns came in information services, a segment that includes database design, social networking, wikis, blogs, and other Web 2.0 companies. Nationwide investment in this area shot up 56 percent to $979 million in 131 deals. Another big winner was medical devices, where 75 deals brought in just over $1 billion. That was the highest tally ever, according to the report, and marked a nearly 60 percent gain over Q2 of 2006.

But despite Boston’s historic strength in both infotech and medical devices, this area took the aforementioned 49 percent nosedive, with VCs investing just $254 million in the second quarter compared to $500 million in the first three months. And while the rest of the nation seemed to be up from year to year, Boston was down 6 percent in the first half of 2007 compared to the same period last year. That falloff enabled New York VCs (whose investments were up 42 percent over last year’s first half), to beat Boston in both deals (35 to 29) and dollars invested ($292 million to $254 million) in the second quarter.

So, what do all these numbers mean? Am I being overly pessimistic? I scrambled to find some VCs Sunday night when the data arrived (most other folks got it Friday, but being new to the media scene, we almost fell through the cracks.)

The only folks I could rouse at that hour were James Geshwiler and Chris Sheehan, co-managing directors of Common Angels, the Lexington-based angel investor group (which is taking the lead in funding Xconomy). Both are great students of trends and numbers and caution not to read too much into one batch of data. “There is definitely seasonality to the numbers,” Geshwiler e-mailed me. “Bigger $ is not necessarily better.”

Sheehan did a quick analysis of the data, which showed that Boston’s 29 second-quarter deals were split 14-14 in IT and health care, with one deal in the energy sector. He reported that the largest single chunk of the falloff seemed to stem from a lack of big biopharmaceutical deals. In Q1 the average area biotech deal was worth $33 million, versus a second-quarter average of $12 million. Indeed, that accounted for about $110 million of the drop. Most of the remaining $140 million or so came from lesser (but still significant) falloffs in software, electronics and computers, energy, and information services. Yes, I said information services. The same area that rose 56 percent nationwide tanked nearly 75 percent in Boston, falling from $86 million in Q1 to just $22 million in Q2.

“It’s hard to say if the overall trend is bad for Boston,” says Sheehan, who among other things points out the area’s great fundamental strength in biotech and promising energy sector. But I still have my suspicions. Time and time again as we sought to raise funds for Xconomy, we heard from VCs, angel investors, and potential underwriters that in general Boston VCs were not funding as many early stage deals as their counterparts around the country—that they were more cautious about diving into hot new areas.

It’s too late now to turn over all these stones. We plan to dive into this issue in more depth during business hours—and get back to you soon.

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

By posting a comment, you agree to our terms and conditions.

  • http://www.commonangels.com James Geshwiler

    There are many factors to consider, and I wouldn’t make too much of any one quarter’s numbers. Also, the deal counts are so small that it is hard to make generalizations (eg. for Boston there were only 29 investments total during Q2, one third were biotech).

    That said, rather than look at totals, I find it more useful to look at trends and averages. Also, since the quarter is somewhat of an arbitrary break, I look at at least half years or trailing 12 months.

    Looking at the first half of the year, dollars and deals are down about 10% over last year. However, that could be because more Boston VCs are investing abroad, making private equity investments or not reporting deals until later (we’ve made several investments that won’t be announced until later in Q3 if not Q4 or next year, for example).

    More catching is for the sector I care about, information technology, average deal size is UP 27% over last year ($11.9M/deal for 1H07 vs $9.3M for 2006). Bigger is not always better in venture capital. It means higher post-money valuations, higher expectations, more dilution for all parties, and the company assuming more risk trying to hit the higher exit. The net can easily be diminished returns.

    Over half the IT deals were software, which is typical. But, only 1 was networking.

    Take a look at the NVCA/PwC/Venture Economics numbers as well. They use a different methodology and report stage of deal. More telling information well be there.

  • Pingback: James Geshwiler at Adventures in Startups & VC writes:

  • http://www.commonangels.com Jame Geshwiler

    For those of you who wish to do your own data mining, I’ve posted the publicly available E&Y/Venture One data on the CommonAngels website, filtered for Boston-area deals, and with an additional section for average deal size. Link is: http://www.commonangels.com/files/EY_VC_2Q%2707_USSub-Regional_Release.xls