Looking at Silicon Valley's startup landscape, where Facebook just raised $16
billion in its initial public offering and newbies like Pinterest and
Instagram have commanded soaring valuations, you'd think optimism would be
running high among venture capitalists.
But the most recent numbers by the National Venture Capital Association
show that venture funding plunged last quarter, even in hot sectors like
consumer Internet.
Venture capitalists poured $5.8 billion into 758 deals in the first
quarter of the year, according to the MoneyTree report the association
prepares with PricewaterhouseCoopers and Thomson Reuters. That was a
double-digit drop in both dollars and deals compared with the fourth quarter
of 2011, when $7.1 billion went into 889 deals.
The life sciences, including biotechnology and medical devices, and
cleantech sectors suffered especially steep decreases in the quarter. Contrast
that with the last quarter of 2011, when biotech was the only one of five
sectors that saw gains in both dollars and deals.
"Venture capitalists remained cautious during the first quarter after a
lackluster fourth quarter in the public markets," said Tracy Lefteroff, who
heads the venture capital practice at PricewaterhouseCoopers.
As further evidence of that caution, he pointed to the ongoing shift of
venture investing from earlier stage companies to more mature companies considered more likely to go public or be acquired. With Facebook's
disappointing failure to gain altitude in the markets after its IPO, optimism
may continue to be in short supply.
NVCA officials also pegged the overall decline in investment in the first
quarter to ongoing consolidation in the venture industry. Other venture
capitalists agreed.
"In the three years after the '08 credit crash, investors became more
skittish about putting money into VC," said Navin Chaddha of Mayfield Fund.
"As the funds got smaller, the amount of money going out gets smaller. It has
to catch up."
Still, he said, there are other reasons for the funding drop-off. Numbers
from the first quarter of last year were skewed upward by a handful of
mega-rounds by Twitter and Groupon. VCs in general have become more content to
let angel investors put money into very early stage startups, then wait to see
which ones deserve follow-on funding.
And despite the consolidation among venture firms, Chaddha sees many
reasons for hope, given that information technology is a $2 trillion industry.
"There's going to be lot of money made," he said.
Bill Reichert of Garage Technology Ventures summed up the seemingly
schizophrenic trends in a recent report on VC confidence compiled by the
University of San Francisco.
"Venture capital has become a tale of two cities: It is the best of
times, it is the worst of times," he was quoted to say. "Or possibly, four
cities."
Reichert elaborated that while VCs have been pouring money into social,
mobile and gaming startups like Pinterest that target consumers, cleantech and
biotech companies can only look on with envy.
