Venture Capital Investment Slips 8% in US; Up 5% Elsewhere

February 20, 2009

This article is included in these additional categories:

Analytics, Automated & MarTech | Asia-Pacific | Europe & Middle East | Financial Services | Pharma & Healthcare

Venture capital investment in US companies in 2008 amounted to $28.8 billion in a total of 2,550 deals, down 8% from 2007 when $31.4 billion was invested in 2,823 deals, according to statistics from Dow Jones VentureSource.? Activity was down overall in the IT and healthcare industries, while it rose in the energy and utilities industry.

The drop for the year in the US was hastened by a slow Q408, with 554 deals garnering $5.5 billion, down 30% from the $7.9 billion invested in 718 deals during the same period in 2007, DowJones said.

In other parts of the world, venture capitalists put more than $13.4 billion into 1,416 deals for emerging companies in Europe, Israel, Mainland China and India. This marks nearly a 5% increase over the $12.8 billion that venture capitalists invested in 1,711 deals outside the US in 2007 and comes despite a 15% drop in annual venture investment in Europe.

US Venture Capital Investment

US IT & Healthcare Slump, Energy Outpaces Financial Services

The US information Technology (IT) industry posted its weakest quarter since 1998 with just $2.2 billion invested in 266 deals in Q408, down 39% from the $3.6 billion invested in 355 deals over in the same quarter of 2007. In total, the IT industry saw overall investment drop 15% to $11.6 billion invested in 1,237 deals from $13.6 billion invested in 1,430 deals in 2007.

The US healthcare industry similarly saw venture investment slip to its lowest point in three years in the last quarter of 2008 with more than $1.5 billion invested in 137 deals, down 42% from the $2.6 billion the industry garnered in 190 deals in Q407. For the year, health-care venture investment fell 22% to $8.2 billion put into 623 deals in 2008 from the record $10.5 billion invested in 709 deals in 2007.

In contrast, the data shows that 2008 proved to be a very good year for the energy and utilities industry, as it saw annual investment more than double to a record of nearly $3.6 billion put into 124 deals from $1.7 billion in 101 deals in 2007. Eighty-six renewable energy deals accounted for 86%, or $3.1 billion, of the industry’s annual investment total.

For the first time, annual investment in the energy and utilities industry outpaced that of the business & financial services industry, which saw investment slip 17% to nearly $2.9 billion in 321 deals in 2008 from $3.5 billion in 362 deals in 2007. Like health care and IT, business & financial services had a poor fourth quarter with just $374 million invested in 63 deals, down 49% from $733 million put into 97 deals during the last quarter of 2007 and the industry’s worst quarterly showing since early 2004, the data showed.

Consumer services saw a resurgence in investor interest in 2008 as the industry attracted $1.3 billion in 99 deals, up 58% from the $822 million invested in 102 similar deals in 2007. The fourth quarter of 2008 saw investment in the sector more than double to $377 million in 17 deals from $142 million in 22 deals during the same time in 2007, but this was because of the $250 million later-stage round for Austin, Tex.-based HomeAway, an online marketplace for vacation rental properties.

According to the report, California was once again the leading destination for venture capital in 2008, accounting for 44% of all deals with 1,121 and 51% of all capital invested with upwards of $14.6 billion. The San Francisco Bay Area attracted the bulk of the state’s venture investment with 848 deals garnering $11.2 billion, up 4% from the $10.8 billion put into 888 deals in 2007 and the regions highest investment total since 2001.

Data for other US regions:

  • New England attracted $3.4 billion in venture capital with 328 deals, 19% less than 2007 when $4.2 billion was put into 377 deals.
  • For the first time since 2003, Southern California saw its annual venture investment fall, down more than 18% to $3.2 billion as the region saw only $422 million in investment in the fourth quarter–its weakest quarter in more than 5 years.
  • The New York metropolitan region saw investment climb 11% to roughly $2 billion in 2008 with 201 deals completed.
  • Washington State saw venture investment fall below the billion-dollar mark for the first time since 2005 with $906 million put into 93 deals, down 35% from the $1.4 billion invested in 124 deals in 2007.
  • Bucking the national trend, Texas recorded its best quarterly investment total since 2001 with $505 million garnered in the last quarter of the year. Even so, its annual investment total fell 11% to roughly $1.2 billion in 2008.
  • Investments in Potomac-area companies fell 9% to $998 million in 84 deals in 2008 from $1.1 billion in 110 deals in 2007.

“The data confirms what we’ve being hearing anecdotally for some time that many venture capital firms are circling the wagons to weather the downturn and are focusing more on the health and vitality of current portfolio companies rather than new investments,” said Jessica Canning, director of global research for Dow Jones VentureSource. “And while traditional areas of investment like IT and health care, which are well stocked with venture-backed companies, are seeing predictable pull-backs, VCs are still eager to put capital to work in burgeoning areas like energy and consumer goods, which saw record investment in 2008.”

Despite increased investment elsewhere, the US remains the world’s leading destination for venture capital.

Non-US Venture Capital Investment

In terms of non-US geographies, venture capital investment was down in Europe and China after a slow fourth quarter, while India and Israel set annual investment records.

Europe Activity Mirrors US

Europe saw a late-year pullback in venture investment which led to an overall annual decline of 15% as investment fell from $7.6 billion in 1,107 deals in 2007 to $6.5 billion in 881 deals in 2008. This marks Europe’s lowest deal count since VentureSource began tracking the region in 1999. Much like in the US, Europe started off with a strong first quarter, only to see investments and deals slide downward over the course of the year. The region ended the year on a low note as investment fell 38% from $2.1 billion in the fourth quarter of 2007 to $1.3 billion in 2008, its lowest quarterly total in more than four years.

As was also the case in the US, Europe’s IT industry saw its overall investment slide 26% from $3.4 billion invested in 560 deals in 2007 to $2.5 billion in 410 deals in 2008. The majority of this decline was in the last six months of the year as the number of IT deals and amount of investment reached their lowest levels on record in the third and fourth quarter.

Similarly, the data showed a late-year slowdown in health care deals and investment in Europe. Venture capitalists invested $1.8 billion in 215 health care deals in 2008, down 28% from the nearly $2.5 billion the region saw invested in 245 such deals in 2007. Both the decline in health care and IT investment in Europe closely mirror trends seen in the US in 2008.

One of Europe’s few bright spots was a surge in energy and utilities investment, Dow Jones said. Venture capitalists put a record $816 million to work in 59 of these deals in 2008, up 89% from the $431 million invested in 52 such deals in 2007.

The median amounted invested in a venture capital deal in Europe reached a record $4 million in 2008.
Country-specific details for Europe:

  • In the UK, VC investment fell 24% from $2.5 billion invested in 337 deals in 2007 to $1.9 billion in 258 deals in 2008. The last quarter of 2008 saw investment drop 54% from the prior year to $320 million, the lowest quarterly total since 2003.
  • For the first time since 2003, Germany outpaced France as the second-most popular destination of venture capital in Europe with $1.2 billion invested in 160 deals.
  • France saw its annual investment slide 29% from $1.4 billion in 2007 to just over $1 billion in 2008 as the number deals completed fell from 239 to 188.
  • Capital investment in Sweden grew 33% in 2008 as $496 million was invested in 63 deals.
  • In Denmark, venture investment fell only 6% from $308 million in 2007 to $289 million in 2008 even though the country saw its annual deal count plummet from 62 to 28.
  • The Netherlands saw its annual venture investment fall 34% from a record $376 million in 2007 to $249 million in 2008.

China, Israel & India Activity

Venture capitalists invested a record $4.2 billion in 245 deals in China in 2008, up from $2.8 billion in 290 deals in 2007, the research found. The region saw investment top $1 billion every quarter in 2008 except for the fourth quarter, which saw investment tumble to $716 million in 54 deals, 9% below the $787 million put into 84 deals in the last quarter of 2007.

IT investments led the way in China as investors put $1.6 billion into 86 such deals in 2008, up 60% over the $1 billion invested in 117 IT deals in 2007. China’s consumer services industry saw record investment in 2008 with $1 billion put into in 50 deals, up 57% from $652 million invested in 51 deals in 2007.
According to the data, the median deal size in China is now the highest in the world – reaching a record $10 million in the region in 2008.

IsraelVentureSource found that investors put a record $1.9 billion into 210 deals for companies in Israel in 2008, up 19% over the $1.6 billion put into 227 deals in the region in 2007. Of that, some $1.3 billion, or 68% of all capital investment, went into 132 IT deals, nearly 30% more than the $1 billion invested in 153 such deals in 2007.

Health care companies in Israel attracted $331 million in 2008, an increase of 4% over 2007. Energy and utilities companies garnered a record $167 million, up 149% over the $67 million invested in the industry in 2007. The data also showed that the median size of a venture deal in Israel also set a record in 2008 and now stands at $5 million.

Venture capital investment in India also set a record in 2008, though its growth was minimal compared to prior years, according to VentureSource data. Investment in India-based companies reached $864 million in 2008 with 80 deals completed, up some 3% from $842 million invested in 85 deals in 2007.

Unlike China and Israel, which have more firmly established business infrastructures, India saw the majority of venture investment go to its business and financial services companies, which garnered a record $368 million in 26 deals in 2008. This is more than double the $144 million the industry saw invested in 20 deals in 2007.

India’s IT industry saw investment fall 45% from $319 million invested in 32 deals in 2007 to $176 million in 22 deals in 2008. Energy and utilities investment in India climbed some 75% in 2008 to $70 million. According to VentureSource, India was the only region to see its deal size hold firm year-over-year, remaining unchanged at $8 million in 2008.

“The venture capital industry continues to rapidly globalize as investors are eager to find and tap new areas of innovation, especially in emerging economies like China and India,” said Canning. “What’s most notable is that the growth in international investment is not being fueled solely by IT, which is traditionally the sweet spot for venture capitalists, but also by energy-related investments.”

About the research: The investment figures included in this release are based on aggregate findings of Dow Jones proprietary research. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. All currency conversions are based on the 2008 weighted average of 1.4726 as set by the US Federal Reserve.

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