Deal Count Rises, But Third Quarter VC Funding Lags Behind ’11 Pace

10/17/12Follow @bvbigelow

Venture capital activity continued apace during the third quarter, with $7.5 billion invested in 835 deals nationwide—the highest deals tally since the dot-com era. But the overall funding total for 2012 is expected to decline from the $30.7 billion invested in 2011, according to a report today from New York financial data firm CB Insights.

Venture firms have invested about $21.5 billion through the first three quarters of 2012, according to CB Insights. The firm predicts that 2012 will therefore be a down year, unless fourth-quarter venture funding soars to $9.2 billion—and CB Insights says, “we’ll bet a healthy sum of money that it won’t.”

The $7.5 billion that VC firms invested during the three months that ended Sept. 30 marked a 5 percent decline from the same quarter of 2011, when VCs provided $7.9 billion in funding, and a 7.4 percent decline from the $8.1 billion invested during the previous quarter. But CB Insights also notes that the 835 deals was the most since the “dot-com days” of 2001. The spike in deals was apparently driven by a growing VC preference for making seed investments in fledgling companies.

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Seed investments accounted for 31 percent of all VC deals that CB Insights counted during the quarter. Investments in mobile startups were particularly strong, with seed investments in mobile and telecom startups representing 42 percent of all mobile deals. CB Insights analysts said one explanation for the high number of seed deals is that individual investments at the seed stage are relatively small and pose little systemic risk to venture funds.

Venture investors also showed a clear preference for mobile deals during the quarter, with $968 million invested in 116 deals nationwide. In its analysis, CB Insights says, “VCs clearly are positioning themselves for the next big wave they see in mobile.” The $968 million in mobile investments throughout the U.S. represented a 75 percent gain over the $553 million that went to mobile deals during the same quarter of 2011—and was 45 percent higher than $669 million invested in mobile during the previous quarter.

On the other hand, venture activity in cleantech startups continued to wane nationwide. CB Insights said $698 million was invested in 47 deals during the third quarter—contrasting sharply with almost $1.5 billion that VCs invested in 49 deals in the previous quarter. During the same quarter last year, venture investors provided $1.2 billion in funding to 70 startups nationwide.

Healthcare, which has traditionally been one of the biggest sectors for venture capital activity, continued to weaken—extending a declining trend of the last several quarters. The almost $1.6 billion that was invested in 134 deals represented a 7 percent decline from the almost $1.7 billion invested in 143 deals during the same quarter a year ago, although it was a slight uptick from the previous quarter, when VCs put more than $1.5 billion in 142 companies.

California maintained its usual No. 1 rank in terms of dollars and deals, with almost $3.9 billion invested in 366 deals during the third quarter. The amount of funding was up slightly from more than $3.8 billion that went into 315 deals during the same quarter in 2011, and was down about 17 percent from the nearly $4.7 billion invested in 363 deals during the previous quarter.

In a breakout of data showing venture activity for Southern California, CB Insights reports that venture investors provided $695 million in 70 deals in eight metropolitan areas, which include Los Angeles and Orange County, San Diego, Riverside, San Bernardino, Oxnard, Thousand Oaks Ventura, Bakersfield, Santa Barbara, and San Luis Obispo. The Southern California region would rank third in terms of capital invested—behind Massachusetts, where $847 million went into 84 deals, but ahead of New York, where $489 million flowed to 86 companies. Of course, even as a subset of California, Silicon Valley would outdistance all others, with an estimated $3.2 billion invested in roughly 296 companies.

Another noteworthy trend inside California is that venture activity in the mobile sector eclipsed healthcare for the first time. The Internet still represents the state’s biggest sector for venture activity, accounting for 43 percent of the nearly $3.9 billion invested and 48 percent of the 116 deals. Yet the mobile and telecom sector ranked as the second-biggest slice of the pie, with 16 percent of the dollars and 17 percent of the deals. California’s healthcare sector had 13 percent of the dollars and 10 percent of the deals.

In Washington state, CB Insights counted $132 million and 24 deals—less than half the $312 million that was invested in 32 startups during the previous quarter. It also was down significantly from the third quarter of 2011, when VCs invested $197 million in 28 startups.

Additional details on third-quarter venture investments are expected later this week in the MoneyTree Report prepared by the National Venture Capital Association, Thomson Reuters, and PricewaterhouseCoopers. The reports aren’t really comparable, because each uses different sources and methods of counting, and they often categorize VC deals in different ways. But it is always interesting to see if the general trends line up between the reports, and where they differ.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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