Report: Venture Capital Activity Declines

Entrepreneurs in the powersports industry seeking first-time funding from venture capitalists may find dollars harder to come by. Yet, according to a recent MoneyTree Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) based on data provided by Thomson Reuters, investors already involved in powersports may be forced to keep money flowing into existing portfolio companies.

“If venture-backed companies can't exit due to continued poor market conditions, venture firms will have to commit additional time and unplanned follow-on rounds of financing to those existing portfolio companies, which will channel resources away from new deals,” says Mark Heesen, president of the NVCA.

Venture capitalists invested $7.1 billion in 907 deals in the third quarter of 2008, according to the MoneyTree Report. Quarterly investment activity was down 7 percent compared to the second quarter of 2008 when $7.7 billion was invested in 1,033 deals. Despite the turmoil in the global financial markets, venture capital investing in the United States remained within historical norms in the third quarter of 2008, the MoneyTree Report indicates.

The dollar value for companies receiving venture capital for the first time declined 12 percent to $1.5 billion in the third quarter. The number of deals also declined, dropping 20 percent to 259, down from the 322 receiving venture capital for the first time in the prior quarter.

First-time financings accounted for 21 percent of all dollars and 29 percent of all deals in the third quarter, compared to 22 percent of all dollars and 31 percent of all deals in the second quarter. The percentage of dollars going into first-time financings is the lowest since the second quarter of 2004, when 20 percent of total investments went to companies receiving venture capital for the first time. The percentage of deals is at the lowest level since the first quarter of 2004 when 27.2 percent of deals went to companies receiving venture capital for the first time.

The average size of the first-time deal in the third quarter was $5.7 million compared to $5.2 million one quarter ago. Seed/early stage companies received the bulk of first-time investments garnering 55 percent of the dollars and accounting for nearly three-fourths of the deals.

Companies in the Industrial/Energy, Software, and Biotechnology industries received the highest level of first-time dollars in Q3. Other industries seeing an increase in first-time financings in Q3 include Semiconductors, Networking & Equipment and Healthcare Services.

“While overall venture investing hasn't yet been impacted by the turmoil in the financial markets, as evidenced by the $7 billion plus invested in Q3, we do expect to see a dip in investing over the next several quarters,” says Tracy T. Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. “Venture capitalists have slugged through difficult economic times before and this one should be no different.

“They may tighten their belts and those of their portfolio companies but they still have money in their coffers and will continue to make investments.”