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By Mel Duvall
A tough year for venture capital financing for technology start-ups ended on a high note as VCs finally loosened their purse strings in the fourth quarter of 2009.
According to a report released by Dow Jones VentureSource, VCs invested a total of $21.4 billion in 2,489 deals in 2009. That represented a 31 percent drop from 2008, when $31 billion was invested in 2,817 deals.
“Venture capitalists are still treading lightly when making investments,” VentureSource Global research director Jessica Canning said in releasing the report. “In the fourth quarter, venture deal activity returned to levels seen before the collapse of the financial markets, but capital invested continued to lag as investors gave companies just what they need to reach the next milestone.”
For the first time on record, healthcare start-ups attracted more investments than the information technology sector. Healthcare garnered $7.7 billion in 701 deals in 2009, compared to the $6.1 billion in 817 deals going to IT. The amount going to healthcare still represented a 14 percent drop from the previous year, while IT experienced a 35 percent fall from 2008 levels.
VentureSource said 2009 marked the weakest year for venture investments in IT since 1996. The trend was more positive in the fourth quarter, with $2 billion being invested in 250 IT deals, an 11 percent increase over the same period of 2008. However, VentureSource warned that 2010 could still be a difficult year for tech startups.
“While venture capitalists as a group loosened their purse strings toward the end of 2009, some startups, especially those seeking first or second rounds, may be in for a rude awakening in 2010,” said Scott Austin, editor of VentureWire. “A large share of companies are due for capital this year and the competition will be fierce.”
Within IT, software companies continued to take the largest chunk of investment, a trend which has been maintained since 2001. Investors put $2.9 billion into 487 software deals in 2009, a 43 percent drop from the previous year. The communications and networking segment was not hit as hard, ending the year with $1.5 billion invested in 123 deals, off 11 percent from the previous year.
Overall, the median deal size in 2009 was $4.7 million, down from $6 million in 2008. Later-stage deals accounted for the largest slice of deal activity with 944 deals, or roughly 39 percent of the total deal count for the year. Seed and first-round investments amounted to 803 deals, worth $3.7 billion.
“After years of a balanced portfolio, investors made a startling retreat from early-stage companies in 2009,” said Canning. “As the exit markets open up and older companies are acquired or go public, it is likely younger start-ups will begin to see more deals and dollars.”
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