VentureBeat

Despite the dreary economic climate, venture investments held relatively steady in the second quarter of 2008. But more of that money is going to later-stage deals, not funding young startups.

Venture firms invested a total of $7.4 billion in 990 deals during April, May and June of this year, according to the latest MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. Although that’s well below the peak of $8.1 billion invested in Q4 2007, it’s only a slight drop from the $7.5 billion of funding in Q1, and the similar amount to the same period last year.

Not that VCs aren’t affected by the rather inhospitable market for IPOs and acquisitions — if you have a quarter without a single IPO, that’s going to have consequences. In this case, it means more venture dollars are needed to keep later-stage startups going as they wait for the exit environment to improve. That’s why later-stage funding rose 15 percent, to $3.8 billion, while first-time investments fell 12 percent, to $1.6 billion.



So why hasn’t venture investment taken a bigger drop? In the report press release, NVCA President Mark Heesen argues that venture firms are taking the longer view and betting that their portfolio companies can weather a temporary downturn. I certainly hope that’s the case, although the dearth of first-time deals doesn’t seem like long-term thinking to me. (Venture firms are benefiting themselves from investors with a long-term view — they actually saw an increase in fundraising during Q2.)

The software industry received the most investment, with $1.25 billion going to 219 deals. But its prominence is waning — software is down substantially from the $1.56 billion invested during the same period last year. Industrial/energy companies, on the other hand, are on the rise, placing second among the industries with $1.15 billion of funding, more than double the $571 million invested in Q2 2007.

The data for the report comes from Thomson Reuters.

Venture capitalists invested $2.2 billion in cleantech companies over the last year, excluding debt and other non-venture financings. That’s a significant 45 percent growth in 2007, and a more robust level than earlier expected.

The data comes from the new MoneyTree report from PricewaterhouseCoopers released this morning. The report finds investment levels in cleantech are at a higher rate than what was reported a few months back by a competing research company, Dow Jones VentureSource.

According to the report, solar installations were by far the most robust, with 125 percent growth, and investments to solar leaped 133 percent to almost $600 million.

Wind and bio-ethanol did well but not quite that well, with installation and production gains of 45 and 32 percent, respectively. However, wind investment grew over tenfold to $115 million. Biofuels fell from 2006, in part due to increased caution over corn-based ethanol.

Take a look at PwC’s chart below, which pegs the growth of cleantech to the rise in oil prices. Note how cleantech hits a sudden spike in 2005, in part inspired by the Iraq war a push toward biofuels in the name of energy security. But, as noted, biofuels are now getting less investment. Now other technologies are getting a push, even as oil prices have unexpectedly taken off, hitting $100 per barrel in February and just crossing a record price of $120 yesterday, with some analysts predicting prices as high as $200.



In part the rising cleantech star is driven by technologies that have nothing to do with electricity or fuel, like those that help reduce pollution and promote recycling, which grew to over $200 million in fundings in 2007.

But you can bet that if high oil prices stick for any period of time, or rise even further, cleantech investment, especially in electricity generation and transportation fuels, will shift even further toward a vertical line.

Even without back-breaking energy prices, the upward trend will likely continue for some time, says Tracy Lefteroff, the global managing partner of PwC’s venture capital practice. Although many venture capitalists have viewed cleantech with caution for several years, he told me, “there’s a phase now where people are seeing there’s sustainability, that they need to play in this space. The demand for these products is going to continue.”

Updated

Venture investment fell 8.5 percent during the first three months of 2008 compared to the final quarter of 2007, according to the new MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. The report is a big, comprehensive study that reinforces what everyone already kind-of knew, or at least suspected. It tracked a total of 922 venture deals worth $7.1 billion — in terms of dollars, that’s an 8.5 percent drop.

In a conference call discussing the report, NVCA Vice President John Taylor emphasized that investment tends to be cyclical, and that the first quarter of the year tends to have less investment than the second or the fourth. But Q1 2008 was also down from the $7.5 billion in venture money invested during the same period last year.

Nina Saberi, a partner at Castile Ventures, said one of the most significant factors that will continue to hurt venture investment is the decreasing number of IPOs — according to the NVCA, there were only five IPOs during the first quarter of 2008. The acquisition market is weakening too, Saberi said, which is putting downward pressure on valuations. All of this means venture firms need to support startups for a longer period of time before their exits, and that firms therefore need to be more careful with how they invest.

First-time deals also fell 18 percent to $1.6 billion invested in 294 companies. Those deals accounted for 23 percent of all venture dollars during this period.

“We see from an early stage investing point of view, the economic slowdown has had an impact and perhaps people are being mindful of the economic slowdown,” Saberi said. “But, at the same time, the effects of it are milder than you might imagine from listening to the evening news.”

The report also breaks the deals down by industry. Biotech received the most money, with $1.27 billion going to 126 deals, but software had the most deals, with $1.26 billion in 234 financings.

Update: Dow Jones VentureSource has broken down Q1 investment by region (see screenshot, left). Not surprisingly, the San Francisco Bay Area saw the most money invested, with $2.56 billion in 213 deals. Southern California came in second, with $672 million in 63 deals.