Venture Capital Rebound Hits First Quarter Speed Bump

Got a spare moment at the airport? Take a look at the business magazine rack, and you’ll see that mainstream titles are heralding the VC market’s return to grace. Investors also are getting in on the act, with talk of increased term sheet competition and a corollary decrease in due diligence.

Most of this hype began when fourth quarter disbursement data was released, showing a 21.5% bump over third quarter tallies. But a lot of the hot air will be cooled today, thanks to some sobering first quarter data.

Venture capitalists invested $4.63 billion into 618 U.S.-based companies during the first quarter of 2004, according to the MoneyTree Survey data compiled by PricewaterhouseCoopers, Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association. This represents an 11.8% drop from the $5.25 billion raised for 739 companies in the fourth quarter of 2003, and also was lower than the tallies of the second and third quarters of 2003.

In addition, health care deal momentum stalled, as the combined biotech and life sciences sectors received just 28.13% of the overall Q1 venture pie. This is a strong proportion compared to a 10-year average of the health care related sectors making up just 13.52% of overall investment activity. But it fell short of the 30.6% and 31.23% marks from Q3 2003 and Q4 2003, respectively.

On a positive note, the first quarter of this year was around 10% higher than the $4.21 billion disbursed between January and March of last year.

Average deal size also hit its highest level – $7.49 million per deal – since the beginning of 2002, and historical survey data almost always rises in subsequent quarters. For example, the MoneyTree only reported $4.92 billion in Q4 disbursements in its Jan. 27 press release, but has since revised the figure upwards to $5.25 billion.

The quarter’s largest deal was for OptionsXpress Inc., a Chicago-based online brokerage that received $90 million from Summit Partners. It is important to note that MoneyTree data only includes called-down capital, which means that only $50 million of a $250 million commitment for Jazz Pharmaceuticals Inc. counts for the first quarter. Palo Alto, Calif.-based Jazz placed fourth in the Top 10 – thanks, in large measure, to an additional $7.85 million called down from an earlier Series A financing.

Jazz was one of seven life sciences companies on the top deals list. The others were: AlgoRx Pharmaceuticals Inc. with $65 million, EXIMIAS Pharmaceuticals Corp. with $63.5 million, Synta Pharmaceuticals Corp. with $50 million, Salmedix Inc. with $45 million, Favrille Inc. with $44 million and Nucleonics Inc. with $40.9 million. Other top raisers included Cornice Inc., which provides storage solutions for portable consumer devices, and CipherTrust Inc., a provider of email protection technologies.

Sequoia Capital – which last year closed its 11th fund at more than $400 million – was the quarter’s most active firm with 18 deals, including Ikanos Communications Inc., Open-Silicon Inc., Sourcefire Inc. and NetScaler Inc. Menlo Ventures was next up with 16 deals, and was followed by 14 deals a piece from Alta Partners and New Enterprise Associates.

Per usual, most VC disbursements were into expansion-stage companies, with $2.43 billion over 278 deals.

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