Like the rest of the economy, the venture business slowed dramatically in the fourth quarter.
Q4 U.S.-based investment data released last week indicate that deal making was down by nearly 30% and fund-raising fell by more than 70% from the same period a year ago.
Venture capitalists invested $5.4 billion in 818 deals in the fourth quarter, the lowest amount of dollars invested in a three-month period since the first quarter of 2005 and a 26% drop from the $7.3 billion invested in the third quarter of 2008, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on data from Thomson Reuters (publisher of PE Week).
For all of 2008, U.S. VCs invested $28.3 billion in 3,808 deals in 2008, marking the first yearly decline of total investments since 2003, according to the MoneyTree Report.
A PE Week analysis shows that many of the industry’s most active investors have dramatically slowed their pace, including
Q4 was the worst quarter for software, as investments in the sector dropped in the fourth quarter to $1 billion in 194 deals, the lowest quarterly investment level in 10 years. The annual declines were much smaller with $4.9 billion invested into 881 software companies in 2008, representing declines of 10% and 7%, respectively, from 2007.
On the positive side, the cleantech sector, which represented seven of the 10 largest deals of the year, experienced significant growth in 2008 with $4.1 billion invested in 277 deals. This investment level represents a 52% growth in dollars and a 16% growth in deal volume over 2007 when $2.7 billion was invested in 238 companies. Cleantech investing accounted for 15% of all venture capital investing in 2008 compared to 9% in 2007.
Thomson Reuters’ data show that four firms that ranked among the top 10 most active U.S. venture firms in each of the first three quarters of 2008 didn’t make the top 10 list for Q4: Kleiner Perkins,
In Q4, Kleiner backed 11 companies, down from 26 in the third quarter; InterWest backed 13 companies, down from 17 in Q3; Sequoia backed nine companies, down from 19 in Q3; and Venrock invested in 13 companies, down from 18 in Q3, according to a PE Week analysis of Thomson Reuters’ data.
Lots of other firms pulled back, too, including the two most active firms in the industry for all of 2008: DFJ and
Some VCs say the decline in Q4 numbers doesn’t indicate that they have slowed down.
“There has been no change in strategy or market-facing activities at Venrock,” says Ray Rothrock, a partner at Venrock. “Deal flow is strong. I think it’s a coincidence [that Venrock’s deal numbers declined in Q4].”
Even Sequoia—which held a meeting with its portfolio company CEOs in October to tell them to brace for a serious downturn—won’t concede that it has slowed its pace. PE Week asked Partner Michael Moritz in mid-November if his firm was making fewer investments, but he replied: “Our doors are as wide open as ever.”
Some VCs are trying to conserve capital because they’re worried that some of their LPs won’t be able to make capital calls. Many have relied heavily on university endowments and public pension funds, which have seen their portfolios hammered by declines in the stock market. “It’s getting to be brutal,” says Robert Hofeditz, a partner at the San Francisco-based placement agency
One Silicon Valley VC whose firm has committed just half its current fund says many venture firms are “hesitant to make capital calls right now. You don’t want to know if your LPs are going to back out.”
The VC, who asked not to be named, calls it the new “don’t-ask-don’t-know school of venture capital. If you don’t know, you can comfortably tell everyone that your LPs are fine. What do you do otherwise? No one wants to sue.”
Some firms are going back to the market to ensure they have capital for a prolonged recession. For example, Kleiner Perkins has gone back to the market to raise annex funds for four existing funds.
Fund-raising slows
On the fund-raising front, 43 U.S. venture funds raised $3.4 billion in the fourth quarter, down from 84 founds that raised $11.7 billion in the last quarter of 2007, according to Thomson Reuters and the NVCA.
For the full year, U.S. venture firms raised $28 billion for 211 funds, a 21% decline from 2007, when they raised $35.5 billion for 247 funds.
“With some notable exceptions, we can expect this slower pace to continue well into 2009,” predicts Mark Heesen, president of the NVCA.
He says many firms have decided to wait for economic conditions to improve before tapping their institutional investors. Additionally, a number of firms raised funds over the past three years and are now working with that money to support new and existing portfolio companies.
Two of the three largest funds raised during the fourth quarter were by Palo Alto, Calif.-based
A handful of growth funds helped to buoy fund-raising numbers in 2008. Sequoia Capital raised two growth funds for a combined total of $1.6 billion during the third quarter. The firm closed on Sequoia Capital U.S. Growth Fund IV at $930 million and Sequoia Capital India Growth Fund II at $725 million.
(ranked by number of companies backed per quarter)
Name_Q1_Q2 _Q3_Q4_Total*
Draper Fisher Jurvetson_36_47_40_22_132
New Enterprise Associates_32_28_24_15_92
Kleiner Perkins Caufield & Byers_33_28_26_11_85
Intel Capital_22_24_27_18_81
Polaris Venture Partners_21_20_25_23_67
Sequoia Capital_27_20_19_9_65
U.S. Venture Partners_17_20_24_24_65
Warburg Pincus_19_24_20_17_55
Atlas Venture Ltd._18_19_18_21_55
Venrock Associates_22_16_18_13_54
InterWest Partners_20_11_17_13_54
*Total is less than sum of quarters because companies backed multiple times per year are counted only once.
Source: Thomson Reuters
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