VC Funding in Free Fall

May 14th, 2009 | Sources: Wall Street Journal

Subjects: ,

Continuing an apocalyptic trend, venture capital investment in Q1, 2009 has dropped 50% from the same quarter a year earlier. 

pulluppullupYoung companies raised a paltry $3.9 billion in the first quarter of 2009, as compared with $7.78 billion in Q1 2008, according to VentureSource.

That represented the lowest quarterly investment in 11 years.

Remarkably, it was $2 billion less than the quarterly investment total in Q4, 2008 when the Great Economic Crisis matured into a fire-breathing dragon. 

VentureSource reported that only 477 venture-backed companies closed equity financings in Q1 2009. The number was 706 one year earlier, and 601 in Q4 2008.

Angel and first-round financing fell even more sharply, to $682 million in Q1. That’s just one-third of the spend a year earlier.

Much of the problem is traceable to the enormous drops in the portfolio values of pension funds, foundations and endowments that typically finance VC firms.

These limited partners had started becoming gun-shy regarding VCs even before the Great Economic Crisis due to underperformance 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 a tighter focus, she said.

IT, a staple for VCs, recorded its worst quarter in 12 years with $1.68 billion invested. That’s off 52% from Q1 2008.

Health care did a bit better, netting investments worth $1.35 billion in Q1 2009, down “only” 34% from a year earlier. The sector saw 118 deals close in the quarter, much lower than the 156 that got done in Q4 2008.


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