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By Mel Duvall
Venture capitalists haven't exactly thrown their wallets open yet, but there are signs that the industry is rebounding, a report from industry tracker Dow Jones VentureSource suggests.
After a substantial dropoff in the first quarter of 2009, venture capitalists injected $5.27 billion into 595 deals in the second quarter. This marked a 32% improvement over the first quarter, which recorded the lowest quarterly investment since 1998.
The healthcare sector was the biggest beneficiary of that uptick, garnering $2.23 billion in 184 deals. This was the first time on record that healthcare outpaced investment in information technology, which attracted $1.88 billion in the second quarter in 248 deals. The IT investment was a slight improvement over the first quarter, but still well below the $3.21 billion invested in 338 deals in the second quarter of 2008.
"As the venture capital industry's rebound gains traction, we're seeing a new landscape emerge," said Jessica Canning, director of global research for VentureSource. "Investors are diversifying their portfolios away from traditional investment areas like biopharmaceuticals and software toward segments like medical devices and information services, while also pulling back on how much they are willing to invest in each deal."
The U.S. software sector saw $696 million invested in 115 deals in the quarter, a 52% decline from a year ago. It was the sector's lowest quarterly investment total since 1997 and the smallest deal count since 1995. "For the past six years, software investment has averaged just under $1.5 billion each quarter but that figure has been cut in half in the first two quarters of this year," added Canning.
The information services sector, which includes most Web 2.0 startups, attracted $572 million in investment in 69 deals, down 29% from the $800 million invested in 94 deals a year ago.
An interesting insight from the survey is that corporations seemed to be taking up some of the slack left by VCs. "As venture investors are forced to hold on to companies for longer periods of time, corporations are beginning to step in to help carry these companies down the last stretch to exists," said Canning.
Here are a few other highlights from the report:
- As usual, California dominated the action, with 42% of the deals and 46% of the capital invested. Still, the San Francisco Bay area saw a 41% drop in capital invested and Southern California saw a 59% decline.
- Investment in Washington State was stable, slipping only 2% in the quarter to $272 million in 40 deals.
- In third place behind healthcare and IT, the biopharmaceutical sector managed to attract $1.42 billion in 85 deals in the quarter.
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