VC deal activity slowed in Q2

Venture capitalists pulled back sharply on investments during the second quarter, reflecting a wait-and-see attitude for all but the most promising companies.

VCs put $2.69 billion into 309 companies during the second quarter, according to preliminary, unaudited data from Thomson Reuters (publisher of PE Week). That’s down significantly from the $7.57 billion investors put into 1,042 companies during the same period in 2008. The official MoneyTree report from the National Venture Capital Association and PricewaterhouseCoopers, based on Thomson Reuters data, is expected to come out later this month.

Biotechnology and health care investments buoyed the investment totals in Q2, accounting for nearly 45% of the dollars put to work during the three-month period.

Four of the 10 largest deals done the quarter were health care deals. Investors put $145 million into anti-cancer company Clovis Oncology; $108 million into orthopedics company Small Bone Innovations; $50 million into light-therapy company PhotoThera; and $46 million into anti-infective medicine developer Cempra Pharmaceuticals.

The two biggest deals were both non-standard VC investments. The $145 million that Clovis raised from New Enterprise Associates, Versant Ventures, Domain Associates and Aberdare Ventures will likely be the only investment it takes. The company is similar to a blank-check acquisition corporation that looks to buy six to seven drug candidates to commercialize. The Clovis management team members previously worked together at Pharmion, which similarly bought drug candidates, and which went public in 2003 and sold to Celgene Corp. in 2008 for $2.9 billion.

Small Bone Innovations went far afield to raise its $108 million. It raised $25 million from Khazanah Nasional Berhad, an investment arm of the Malaysian government and set up its Asia-Pacific hub in Kuala Lumpur. Small Bone Innovations also took an undisclosed sum from The Family Office, a multi family wealth management firm based in Bahrain. Other investors included Goldman Sachs and private equity firm Trevi Health Ventures.

Although VCs put fewer dollars to work overall, each company that got money collected more than it might have a year before. The average investment round size was $8.5 million during the second quarter, up from $7.2 million during the same period a year ago.

Cleantech investments fell significantly during the second quarter. VCs put $237.8 million into 21 companies, according to the preliminary data. That’s down from $898 million VCs put into 67 cleantech companies during the same period last year.

Thomson Reuters’ preliminary data runs counter to a report late last month from accounting firm Deloitte and the consultancy Cleantech Group, which reported that investments in cleantech reached $1.2 billion in 94 cleantech companies during the second quarter, a 12% increase over the first quarter, when global investment bottomed due to the global banking crisis. However, Cleantech Group’s quarterly investment report included subsized federal loan guarantees and investments in companies based outside the United States. It is unclear if their report also includes project financing.

The biggest cleantech deal of the quarter, according to Thomson Reuters, was the $50 million carbon-sequestration company Powerspan Corp. raised from AllianceBernstein, George Soros, Tenaska Energy, the Angeleno Group, Calvert Social Venture Partners, NGEN Partners, Persimmon Tree Capital and Rockport Capital Partners.

Fund-raising down, too

Deal activity wasn’t the only downer for VCs in Q2. Venture firms raised $1.7 billion for 14 funds during the second quarter, down more than 80% from the same period in 2008, according to preliminary data from Thomson Reuters. The NVCA and Thomson Reuters expect to release official fund-raising data later this month.

The amount raised by U.S. venture firms is the lowest since the third quarter of 2003, records show.

Health care investor Domain Associates raised the most money during the second quarter, collecting $371 million for an eighth fund of unspecified size that is still in fund-raising mode, according to reports.

IT and cleantech investor DCM held a $350 million first close toward a $505 million sixth fund, according to reports.

The only new firm to successfully close a fund was Andreessen Horowitz. The early stage IT fund raised $300 million, beating the $250 million target it had set (see story, page 1).

East coast firms seemed to weather the financial crisis better than their West Coast counterparts. Firms based between Connecticut and Alabama raised $990 million, data show.

Perhaps limited partners have more faith in the region’s ability to produce successful companies than Greylock Partners, which shuttered its Massachusetts offices last quarter.