Silicon Valley cheered three months ago when there was a slight uptick in venture capital investment during the second quarter of the year. Sure, investment was down 50 per cent from a year ago, but at least it was up from the first quarter, representing a “new normal” from which growth could begin anew.
Turns out the celebrations were premature. Investments in US venture-backed companies dropped in the third quarter, putting 2009 on track to be the worst year since 2003, according to new data from Dow Jones VentureSource. The total number of deals was up to 616, from 595 the previous quarter. But the total dollars invested was down to $5.1bn from $5.4bn.
“The slow recovery we’ve seen for venture capital has faltered,” said Jessica Canning, director of global research at Dow Jones VentureSource. “As liquidity and fundraising lag after the economic meltdown in 2008, investors have no choice but to keep a tight rein on investments until the industry is on more solid ground.”
Nor are many venture firms raising new funds. Just 17 VC firms raised new funds in the third quarter, the smallest number since the third quarter of 1994, according to Thomson Reuters and the National Venture Capital Association.
What’s worse, VentureSource didn’t take a rosy view of the future. “The current investment pace will likely persist right through 2010, as long as limited partners – the pension funds, university endowments and other suppliers of capital to venture firms – continue to scale back their commitment levels to venture funds,” said Scott Austin, editor of Dow Jones VentureWire. “With fewer dollars to put to work, venture firms will only invest in the most promising and capital-efficient companies going forward.”
For the perennial optimists of sunny Silicon Valley, that’s sounds like a dark cloud that may be hard to escape.
