21 April 2009

Q1 VC Numbers Are In...Here's the Good, the Bad, and mostly, The Ugly

The Q1 VC numbers are in, and they ain't particularly pretty...

Here's an excerpt (courtesy of Dow Jones VentureSource):

"Venture capitalists invested just $3.90 billion in U.S. companies in the quarter, a 50% decline from the nearly $7.78 billion invested over the same period in 2008 and the lowest quarterly investment total since 1998."

Other key takeaways are:
  • 477 deals completed in Q1, lowest quarterly total since 1996
  • Overall technology investing is down 51%, while healthcare is a bit stronger (down only 34%)
  • Software had 117 deals done, a 50% decline from the same period last year
  • Median deal size shrinks 73% to $2.4 million
This last bullet is the most intriguing to me, and perhaps there is a tiny silver lining in this otherwise stormy cloud. The median size of $2.4 million is down from the $9-million median seen a year ago...so if deal sizes are getting a lot smaller, does this mean investors are investing in earlier stage companies?

Not necessarily. Dow Jones also states that later-stage financing rounds accounted for 55% of all venture investment in the first quarter of 2009, up from 47% in the same quarter last year.

So what's happening here? It's unclear. In other recessions, such as in the 2002 period, VCs have often shifted their focus to later stage investing, on the assumption that later stage means less risk.

Some VC firms started investing in mezzanine rounds, and some even went much further. For example, way back in 2001, I worked at JP Morgan pitching PIPES -- "private investment in public equities"-- to VCs, which is about as late stage as you can get (the VCs are literally buying public stock, but at a discount). But in this market, the public markets are all but closed. So buying late-stage stock with the goal of flipping doesn't work.

The most likely answer is that: a) VCs are hoarding their dollars and b) the dollars they are investing, they are putting into their existing portfolio companies, but really turning the screws to get them lean and mean. That's the only logic I can find to explain the conflicting trends of later-stage and smaller rounds

Anyway, there's no real way to sugarcoat it-- the venture funding market is in pretty rough shape right now.

But as always, the companies that can bootstrap their way through the "lean times" are always the ones ready to rock and roll when the purses open again. And they always do open, usually en masse. Hang in there!

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