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.
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