VC investments drop in Q1

Investments in startups fell 5% to $7.1 billion during the first three months of 2008, compared to $7.5 billion in the same quarter last year, a possible sign that investors may be less willing to open their wallets during a U.S. economic downturn.

Despite the decline, the 2008 first quarter saw the fifth-highest level of investment for the period since 2001, according to the MoneyTree Survey by the National Venture Capital Association, PricewaterhouseCoopers and Thomson Reuters (publisher of PE Week).

VC firms invested in 922 deals in the latest quarter, compared to 861 deals in the year-ago period.

The cleantech sector, which consists of alternative energy, pollution and recycling, power supplies and conservation, saw $625 million going into 44 deals in the quarter. The amount invested in cleantech represented a 51% jump from the more than $400 million that went into the sector in the first quarter of 2007.

However, about one-fifth of last quarter’s total came from one company. Broomfield, Colo.-based Range Fuels Inc. raised $130 million last quarter from Khosla Ventures, Morgan Stanley Private Equity, Pacific Corporate Group and Pequot Capital Management Inc. Companies in the life sciences industry, which includes biotechnology and medical devices startups, raised the most money during the Q1, with $2.3 billion going into 220 deals.

Internet-specific companies, defined by the MoneyTree as companies whose business models depend on the Internet, received $1.3 billion during the quarter, up from $1.29 billion in the year-ago period.However, the well for backing startups could soon go dry if the market for IPOs remains weak.

With the ongoing stock market uncertainty, IPOs of VC-backed companies fell dramatically, with only five such companies going public in the first quarter, compared to 18 in the year-ago quarter.

But industry experts remained confident that venture dollars would continue to go into a variety of investments.

“VCs have weathered numerous economic cycles and will continue to fund companies with innovative ideas and solid business models,” said Tracy Lefteroff, global managing partner at PricewaterhouseCoopers‘ venture capital practice.