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MoneyTree Report Sees Third-Quarter Slowdown in U.S. Venture Investments

Xconomy National — 

Venture capital firms invested $6.95 billion in 876 deals throughout the United States during the three months that ended Sept. 30, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.

The numbers marked a slowdown from the preceding quarter, when venture capitalists put $7.9 billion in 1,015 deals.

But look at what’s happened since June: Fresh worries about Europe’s debt crisis, U.S. market volatility, and waning economic confidence all followed a protracted political stalemate over raising the federal debt ceiling and adopting a new federal budget. Are we better off than we were six months ago?

Still, VC activity during the third quarter was significantly better than a year ago. The MoneyTree Report, based on data from Thomson Reuters, shows that the $6.95 billion VCs invested during the third quarter of 2011 was nearly a third more (31 percent) than the $5.3 billion invested during the same quarter last year. The 876 deals also was higher, albeit only slightly, than the 850 deals counted during the third quarter of 2010.

The slowdown charted in the MoneyTree Report contrasts with the VC report released last week by CB Insights, which shows continuing momentum, with VC activity strengthening this year from $7.5 billion invested in 738 deals during the first quarter through the $7.9 billion invested in 790 deals during the third quarter.

The MoneyTree Report also highlighted a fairly dramatic shift in VC activity, with funding flooding into the software and Internet sector and pulling back in the life sciences and cleantech sectors.

Venture investments in 263 software and IT-related deals totaled $2 billion during the third quarter—the biggest slug of money to go into IT since the fourth quarter of 2001, according to the MoneyTree Report.

Meanwhile, venture funding for biotech startups fell. The $1.1 billion invested in 96 biotech deals nationwide during the third quarter represented an 18 percent drop in dollars and a 20 percent decline in deals from the preceding quarter, according to Tracy Lefteroff, a global managing partner of PricewaterhouseCoopers’ U.S. venture capital practice. Funding for medical devices and equipment showed a similar decline. The $728 million that was invested in 74 deals during the quarter marked an 18 percent decline in capital and a 21 percent fall in deals compared with the preceding quarter.

“For life sciences investors, 2011 started with quite a bit of optimism, with six IPOs in Q1 and a nice bump in Q2 investment,” said Nina Kjellson, a general partner in the Menlo Park, CA office of InterWest Partners. “But we’re now returning to the underlying volatility and conservatism that has been seen for the last 18 to 24 months.”

Lefteroff attributed the slowdown in life sciences to the “continuing difficulty that life sciences companies were having in dealing with the FDA in getting transparent pathways to getting their products approved.” Kjellson agreed, saying, “The FDA has been the target for a great deal of lobbying by the NVCA, industry groups, and VC groups. But we’re beginning to see all that activism now turn into action with some exciting proposed legislation introduced very recently to help reform the FDA.”

As for the surge in IT-related venture funding, Kjellson pointed to the macro trends in that sector. “There’s just enormous disruption in IT due to two major platform changes in social media and mobile.” And in enterprise software, Kjellson quoted InterWest partner Bruce Cleveland as saying, “We spent the last 25 years selling technology inside the enterprise, and we’re going to spend the next 10 years getting that technology out of the enterprise and into the cloud or hosted and SaaS [software as a service] space.”

In the cleantech sector, Stephan Dolezalek of VantagePoint Capital Partners says it appears the United States has been holding back its venture investments in renewable energy and other sustainable technologies. He attributed that to three broader economic factors: The closing of the IPO window “and a concern that window might not reopen before the 2012 election;” a significant drop in solar panel prices due chiefly to the Chinese government’s “strong level of support” for its solar and wind companies; and the “chilling effect” of the political battle surrounding the collapse of Solyndra, the Fremont, CA-based solar company.

“It’s put enough fog on the road that investors in cleantech have largely slowed down to see what’s going to happen next,” Dolezalek said.