Venture capital deals declined in both the fourth quarter and for all of 2012, according to the new MoneyTree report from the National Venture Capital Association and PricewaterhouseCoopers.

In 2012, VCs invested $26.5 billion in startups, down 10 percent compared with $29.4 billion a year ago. The number of investments was 3,698, down 6 percent.

In the fourth quarter, VCs invested $6.4 billion, down from $6.6 billion in the third quarter and $7.4 billion in the fourth quarter a year ago. The average deal size in the fourth quarter was $6.6 million, down from $7.2 million in the third quarter and $7.6 million a year earlier.

The second half of the year was definitely more pessimistic, particularly after the tepid initial public offering of Facebook. In the second quarter, when confidence was still high, VCs invested $7.3 billion with an average deal size of $7.7 million.

“Most people would say, ‘Oh, my gosh, the sky is falling,’ ” said Mark Heesen, the president of the NVCA, in an interview with the San Jose Mercury News. Instead, he thinks the pullback will result in “a more disciplined environment. The companies that are going to be funded are going to be really good, and a lot of the ‘duplicative’ companies aren’t going to be funded.”

Investors appear to be concerned about budget battles on the federal level. Sectors such as biotech and cleantech suffered. But software companies raised $8.3 billion in 2012, which was more money raised in a single year since the year 2001, according to the report. Cleantech investments fell 28 percent in 2012 compared to 2011. In the fourth quarter, cleantech investments totaled $535 million in 67 deals, down 36 percent in dollars from the third quarter. Life sciences deals fell 15 percent in 2012 to $4.1 billion.

VCs are shifting toward early stage investments. In 2012, they invested in 1,638 early-stage deals, compared to 1,555 a year earlier. The number of expansion deals fell from 1,022 in 2011 to 956 in 2012. And the number of late-stage deals fell from 917 in 2011 to 830 in 2012. But seed investments also declined from 443 in 2011 to 274 in 2012.

Internet investments totaled $1.5 billion in the fourth quarter, compared to $1.7 billion in the third quarter and $1.5 billion a year ago.

The top 10 U.S. venture deals during the fourth quarter were:

Intarcia Therapeutics, Hayward, Calif.; $155.9 million.

IO Data Centers, Phoenix, Ariz.; $90 million.

Zulily, Seattle, Wash.; $85 million.

BrightSource Energy, Oakland, Calif.; $83.6 million.

Valeritas, Bridgewater, N.J.; $75.6 million.

Ultragenyx Pharmaceutical, Novato, Calif.; $75 million.

Cloudera, Palo Alto, Calif.; $64.7 million.

23andMe, Mountain View, Calif.; $58 million.

Calxeda, Austin, Texas; $55 million.

Street Response Laboratories, New York, N.Y.; $53 million.
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The top 10 U.S. deals of 2012 were:

SquareTrade, San Francisco: $238 million.

Square, San Francisco; $200 million.

Intarcia Therapeutics, Hayward, Calif.; $155.9 million.

Fisker Automotive, Anaheim, Calif.; $147.6 million.

Sapphire Energy, San Diego $139 million.

Fisker Automotive, Anaheim, Calif.; $129.7 million.

Box, Los Altos, Calif.; $125 million.

Drilling Info, Austin, Texas; $116.8 million.

Harvest Power, Waltham, Mass.; $112 million.

Elevance Renewable Sciences, Woodridge, Ill.; $104 million.

The announcement that BuyWithMe, the No. 3 daily deals site on the Web, was cutting significantly more than half its staff followed an unsuccessful attempt to raise capital at a $500 million valuation.

BuyWithMe Chief Operating Officer David Wolfe said in an email that the company was the victim of an increasingly-hostile investment landscape for daily deals companies.

“The capital markets willingness to invest in *daily deal* businesses has dried up,” said Wolfe. He outlined some of the company’s recent efforts to boost customer acquisition and strengthen audience retention, which was to be aided considerably by the money they were looking to raise.

Those plans were cut short.

Wolfe: “We were a little late”

“Our game plan was to raise a significant amount of capital to push this comprehensive service offering deeply into markets and, as a result, change the basis of competition in the daily deal space. We were a little late,” said Wolfe.

This time last year a national daily deals player unable to raise money would have been almost unimaginable. After rejecting Google’s $6 billion buyout offer, Groupon in January went back to the private markets and raised a whopping $950 million Series D round of funding led by the likes of Morgan Stanley, Yuri Milner’s DST and Greylock, among others. However, the national competition continues to grow more fierce, as customers and merchants become more savvy about flash offers. As we reported today, however, industry experts such as Vinicius Vacanti, CEO of Yipit, and Martin Tobias, CEO of Tippr, believe that there has never been a better time for daily deals offered by large Web players like Google or Amazon who can capitalize on their existing audience.

Capital markets are drying up

A report released yesterday showed that capital markets are, indeed, shrinking. The study by PricewaterhouseCoopers and the National Venture Capital Association showed that venture capital investing dropped by 12 percent during the third quarter of 2011, compared with last year. There were 876 deals completed in the quarter, down from the 1,015 in quarter two 2011.

Deals site HomeRun was recently acquired by Rearden for an undisclosed sum, which included at least $83 million in cash, according to an SEC filing. Such a liquidity event is looking like a better and better exit for deals sites in these uncertain times.

“We fundamentally believe in the future of the *daily deal* (performance based online advertising for offline businesses) and want to be around to see another day,” said Wolfe.

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In Silicon Valley, money has been flowing like rivers into web startups. But now some investors and entrepreneurs say it is getting harder to raise money. Some entrepreneurs are turning to bridge financing or are beginning to accept lower valuations in exchange for funding.

The story ignited a debate in the Twittersphere among a number of angel investors. Some agree there has been a modest drop in valuations, but there is plenty of cash available and it isn’t clear if the small or the large deals are being affected the most.

There is still excess funding available for most of the market, but early-stage companies are running into headwinds, the Journal said. The Journal went on to say that the trends are similar to the late 1990s, just as the dot-com boom turned into a bust. The Journal also cited the third quarter report from the National Venture Capital Association, which said that venture fundraising fell to its lowest quarterly level in eight years.

It isn’t clear what the fundamental reason for the slowdown is, though it could be the ailing worldwide economy, a pause in innovation, a slowdown in the cycle for web-based startups, or the fears of Wall Street finally spooking investors in Silicon Valley.

What do you think? Please take our poll. Please explain your vote in the comments.

Heesen is president of the National Venture Capital Association, and he made today’s remarks on-stage at the group’s annual meeting. The good thing about Obama is that “this is a president and an administration that understands technology,” he said. The downside, however, is that Obama’s adminsitration took on too much, too quickly.

“I think they’re suffering the backlash from that right now,” Heesen said.

Perhaps the biggest issue for venture capitalists is a proposal to reclassify carried interest, the money that partners earn on investment profits, from capital gains to regular income. That would dramatically increase taxes for VCs. This is a recurring issue that we’ve covered in the past, and one that was previously defeated, but it’s being considered again as a way to help pay for health care reform. The problem, Heesen said, is that the government is rapidly running out of ways to generate new revenue, so carried interest is “the lowest-hanging fruit right now.”

The NVCA continues to campaign against these changes. It plans to run advertising on political website Politico emphasizing venture capital’s importance to job creation, and has also launched a Web page where VCs and others can register their opposition to the proposal.

Heesen also discussed the proposed financial reform legislation that includes new restrictions on angel investing. The NVCA and the Angel Capital Association have explained their objections to Senator Chris Dodd, who authored the bill, and Heesen said the senator understands that he was “not working on the side of the angels.” Those restrictions will be changed into something more favorable, Heesen said.

Beyond government policy, Heesen also commented on broader changes to the venture industry. It has almost become a cliche that the venture capital industry is shrinking, but Heesen said that doesn’t mean that most firms will disappear. If you look at the past year or so, firms that previously raised $300 million funds are now raising funds of $100 million or $150 million, he said.

“Those firms are going to stay, but instead of having three partners they’re going to have two partners,” Heesen said.

VCs tossed $7 billion at startups in the fourth quarter, a substantial 12 percent rise over the same quarter last year, according to data published by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Financial. Fourth-quarter funding slumped a bit compared to the average of $7.5 billion raised in each of the first three three quarters, although it’s difficult to say at this point whether that reflects early economic nervousness or simply a seasonal Q4 slowdown in the deal flow.

Overall 2007 investment in venture firms also rose 11 percent to $29.4 billion, a six-year high. (Of course, the 2007 figure is still dwarfed by the staggering $105.1 billion that flowed into Web and genomics startups in 2000 at the height of the bubble.)

Biotech companies led in overall financing, raising $1.29 billion in the quarter — a four percent rise over last year — which let the sector narrowly edge out software, which pulled in $1.27 billion. The two sectors are effectively tied at this point, and have traded the first-place slot back and forth since mid-2006.

Medical devices also had a strong quarter with $900.7 million in funding, nearly a 35 percent increase over last year. Two of the top ten financings in the quarter were the medical-device firms Evalve , a maker of heart-valve repair kits, and Zosano Pharma, which is developing needle-free patches that deliver drugs through the skin. These companies raised $60 million and $45 million, respectively. Biotech’s sole representative in the top ten deals was Ambit Biosciences, which received $49.3 million to support its development of new cancer drugs.

Cleantech funding almost doubled over the previous year, reaching $468.7 million in the quarter — apparently a record quarter. Major deals included EverPower Renewables, which raised $55 million for wind-power farms and Serious Materials, which drew $50 million for green building materials.

It’s notable that the funding directed to early stage companies has continued to edge up over the past six years, reaching $6.3 billion in 2007. That comes against a backdrop, however, in which expansion- or late-stage companies are absorbing an increasing portion of all funding. (See the second chart at the bottom of this post.)

For a closer look, check out these lists of the top ten deals in the fourth quarter and all of 2007 (Excel spreadsheet files). If you prefer, here is a slide show of Q4 and 2007 trends (PDF), and here are the raw numbers (Excel spreadsheet).

A competing set of VC-funding numbers from Dow Jones VentureOne and Ernst & Young aren’t due out until Tuesday, but I’ll poke through them then to see if there’s any news worth reporting. Meanwhile, here are some more graphics for your weekend enjoyment.

Venture capitalists invested robustly during the third quarter, at or near record levels since 2001, according to two surveys released last night.

So all is OK on the investing side, even if the venture capital firms themselves are showing signs of pain. Friday, news spread of yet another venture capital firm that has put its fund-raising plans on hold, because investors found its results too mediocre to justify reinvesting. The firm, Sequel Venture Partners, of Boulder, Colo, invests in health care and technology.

Venture capitalists invested $7.1 billion during the third quarter, comfortably above levels of the same quarter last year, but showing a slight drop off from $7.3 million or so pace set in the first two quarters of this year, according to data published by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Financial.

This was followed by data from VentureOne and Ernst & Young, which shows a more robust investment picture. Venture capitalists invested $8.1 billion the third quarter, up from strongly from $7.5 billion in the second quarter, and $6.3 billion the same quarter a year ago, according that survey. It was the ninth straight quarterly increase, and the highest since 2001.

The quarter saw notable increases in both the clean-tech and internet companies.

Software and life sciences remain the most heavily funded sectors, with $1.11 billion and $1.9 billion, respectively, according to the NVCA/PwC/Thomson survey. Clean-tech, however continues to draw more interest, with $844 million in investment, or an 80 percent increase compared to the second quarter of the year. Three of the top five deals this quarter were in clean-tech.

The whopper was GreatPoint Energy, of Cambridge, Mass, which raised $100 million — one of the largest deals ever for the sector. It converts coal and biogass into clean natural gas (see our coverage of the deal, announced last month), and is backed big-name investors Kleiner Perkins, Khosla Ventures and Draper Fisher Jurvetson. The only company raising more than GreatPoint was Globus Medical, which raised $110 million.

Looking more closely at the NVCA/PwC/Thomson survey, here’s a full list of the top deals for the first quarter: Download Excel file.

Silicon Valley had the most deals, as usual. For a full list of all of the Silicon Valley company fundings, by company, investors, amounts, sector, location, and stage, see this detailed file (downloads Excel). Here’s a slide show of national trends (downloads pdf), and the detailed numbers are here (Excel file).

The year is still on pace to be the biggest year for venture investments since 2001.

Internet companies got $1.1 billion, a 17 percent increase in dollars over the second quarter. Media and entertainment was hot too, with $509 million compared to $464 million in the second quarter.

The dollar value of first time deals (companies receiving venture capital for the first time) was $ 1.7 billion, which remains high compared to last year. However, seed deals in the third quarter fell 15 percent to $1.4 billion compared to the second quarter.