quarterly totals recorded since the end of the dot-com boom in 2001.
"While the U.S. investment total is down compared to last year's impressive second quarter, we still saw steady deal activity and investment in the first half of the year, which is encouraging," said Jessica Canning, Director of Global Research for Dow Jones VentureSource. "Venture capitalists commonly take the long-view when it comes to investing. While IPOs and acquisitions may be rare now, VCs aren't concerned about that. They're focusing on what's next -- and that's reflected in the healthy early stage investment we're seeing in areas like renewable energy, information services and business support services."
Both IT & Health Care Decline
According to the report, the information technology (IT) industry saw deal flow drop 27% from 390 deals in the second quarter last year to 286 in the most recent quarter -- the lowest deal count since the first quarter of 1997. Similarly, investments were down 26% from nearly $3.50 billion to $2.60 billion, the lowest quarterly investment total since 2003. The information services sector, which includes the majority of today's "Web 2.0" companies, was the only area within IT to see positive gains with $688 million invested in 80 deals, a 20% increase over the $572 million invested in 94 deals during the same period last year.
Health care companies also fared poorly in the second quarter with the industry only seeing 149 deals completed and $1.98 billion invested. That is 22% less than the $2.53 billion that was invested in 181 health care deals in the second quarter of 2007.
"The health care industry is the most concerning at the moment, as investment is down 31% compared to the first six months of last year and deal flow is at its lowest level in three years," said Ms. Canning. "Considering the amount of time and capital it takes VCs to build a successful life science company, there may be a hesitation to continue investing in these companies given our current IPO market conditions."
The data showed that the majority of the health care industry's investment decline in the second quarter was contained in the medical devices sector, which saw just 60 deals completed and $798 million invested, a 25% drop-off from the $1.06 billion invested in 72 deals during the same time last year.
Energy & Utilities Shine as Focus Shifts to Cleantech
One bright spot highlighted by the data was the energy and utilities industry, which posted a record quarter with $817 million invested in 32
deals, up 160% over the $314 million put into 23 deals in the second quarter of 2007. Most notably, there was a big surge in renewable energy investments as the sector saw $650 million put into 26 deals, records on both accounts.
"The movement of venture dollars from the traditional areas of information technology and health care toward burgeoning sectors like
renewable energy, power management, and agriculture -- or 'clean technology' areas -- proves that venture capitalists are making good on
their promise to tap opportunities in the massive energy market," said Ms. Canning.
According to the report, the top three venture capital deals in the second quarter all belonged to solar energy companies. Taking the top spot was SunEdison of Beltsville, Maryland, which raised $131 million (as well as an additional $30 million in separate debt financing) in its second round. eSolar of Pasadena, Calif., garnered $130 million and BrightSource Energy of Oakland raised $115 million.
Compared to the second quarter of 2007, the smaller business and financial services (up 6% to $771 million) and industrial goods and materials industries (up 14% to $150 million) both posted modest gains while the consumer goods industry saw investment drop 24% to $121 million.
Later, Larger Deals Dominate But Early Stage Investment Continues
The quarterly report also confirmed that later-stage deals continue to attract the lion's share of venture capital with $3.48 billion, or roughly 54% of the quarter's investment total, put into 225 rounds. This pushed the median deal size of a later-stage round to a record $12 million in the first six months of 2008.
Early stage deal-making did not take a back seat, however. In fact, the number of first rounds actually ticked up from 200 rounds completed in the first quarter of the year to 207 in the most recent quarter while the later-stage deal count saw a corresponding dip.
"The most encouraging part of this quarter's report is that early stage investing is holding relatively steady thus far in 2008," added Ms.
Canning. "It may be harder for entrepreneurial companies to raise venture capital these days but it's by no means impossible. Continued early stage deal flow is a good sign that the venture industry is prepared to weather the economic downturn and will continue to back the next wave of disruptive technologies."
According to the data, the median deal size of a first round was $5 million in the first half of 2008, an annual figure that has remained unchanged since 2004.
The overall median size of a venture capital deal in the U.S. -- including all stages of development -- climbed to $7.5 million in the first half of 2008, the highest total on record.
Regional Perspectives
California once again dominated the venture capital activity in the second quarter, representing 45% of the nation's deal flow with 273 deals completed and nearly 51% of the capital invested with $3.36 billion. By major region, the report showed:
- The San Francisco Bay Area saw a 9% decline in overall venture investment with $2.17 billion invested in 193 deals as IT investment was off nearly 21%.
- Despite seeing investment slip 2% to $868 million in 67 deals, Southern California remained the second most popular region for venture investment, beating out New England, which saw investment drop nearly 23% to $714 million in 76 deals.
- The New York Metro region attracted $350 million in 42 completed deals, 16% less than the $415 million invested in the second quarter last year.
- The Potomac region was one of the two major regions to see a capital increase as investment ticked up 11% to $268 million in 19 deals.
- Investment in the Washington State climbed 4% to $275 million invested in 25 deals.
- Capital investment in the Research Triangle region dropped 4% to $118 million with 10 deals closed in the quarter.
- Texas saw investment drop 65% to a paltry $90 million invested in 13 deals, the region's lowest quarterly investment total in at least six
years.
The investment figures included in this release are based on aggregate findings of Dow Jones proprietary U.S. research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice.
