Are venture capital investments getting sideswiped by thefinancial turmoil? So far, the answer is: not really. Venture investments did slow in the firstquarter of 2008, but the decline in financingto startups had less to do with the ripples of anailing economy than a sudden dropoff in investments in the biotech sector. According to Dow Jones VentureSource, VC firmsinvested $6.8 billion in U.S. companies during theMarch quarter, down 7% from a yearago. Recent quarters had been showing a slow butsteady increase in the amount of money invested byVCs. For the most part, VCs were not making smallerinvestments as much as they were financing fewerstartups. Only 603 companies received venture money,25 fewer than a year earlier. VentureSource cautioned that one slow quarterdoesn't necessarily signify a trend. "While we arewatching closely to see if the slowdown in the overalleconomy will infect the VC community, it's simply tooearly to know for sure," said Jessica Canning,VentureSource's research director. "The ventureindustry is usually insulated from the immediateeffects of an economic downturn. The biggest decline in investments came inhealth-care companies, which declined 43% to $1.74billion, spread throughout 142 companies. A year ago,175 deals received $3.06 billion. Hardest hit werebiopharma startups, which saw 59% less VC moneythis quarter. Venture capitalists say they take a long view oninvesting, looking for exits five years down the roador more. In recent years, a recovering IPO market mayhave accelerated the time schedules for incubating ayoung company. But the IPO market is one of the first to react toeconomic downturns, as investors grow gun-shy aboutoften unproven startups going into a bear market.VentureSource noted that IPOs are the preferred exitfor biotech companies in particular. And the quarter was a bad one for VC exits. Only 5VC-backed startups went public, raising $283 million.Both were the lowest figures since the June quarter of2003, the National Venture Capital Association said.And only 56 venture-backed companies found exitsthrough M&A deals, the smallest number since thefourth quarter of 2000. Last quarter, as the IPO market grew quiet (despite the well-received entrances of Visa ( V), Heritage-Crystal Clean ( HCCI) and Asia Time ( TYM))however, VC firms didn't shy away from late-stageinvestments, which typically are among the largestthey make. Late-stage rounds comprised 39% offirst-quarter venture fundings, up from 32% a yearago. It was the seed rounds and first rounds that sawthe declines, dropping to 35% of the total from 42%last year. Bucking the trend, however, were informationtechnology companies. Investments in IT startups morethan doubled to $1.59 billion for 170 companies,as VCs tried to find startups that could tap into thefast-evolving Web. VCs may have been also taking a cautious tone fromtheir own investors. In a separate report thatreceived little attention earlier this month, the NVCAsaid money flowing into VC funds in the first quarterslowed somewhat. In the March quarter, 57 VC funds raised $6.3 billion,less than half the $11.7 billion raised in theprevious quarter. It was the smallest number of fundsraising money since 2005. In addition, the dollar amount was the lowestsince the March quarter of last year, when 83 VC firmsraised money. Only 5 of the 57 firms raised money fornew funds, the rest were follow-on investments forexisting funds, a percentage that the NVCA said wasremarkably low given recent quarters. The decline comes after VC firms raised$96 billion from 2005 through 2007 -- it may be that funds'appetites may have been sated for now. So yes, there was a modest slowdown in theinvesting that VC firms did during the first quarter,backed up by a slide decline in the money they, in turn, wereraising from their own investors. Those investors,largely pension and institutional funds, are anythingif not cautious these days.
In fact, given all the talk only last summer abouta reinflation of a financial bubble in Silicon Valley(supposedly driven by a resurgence of venturecapitalist greed) the pullback could well prove a goodthing -- provided, of course, that it doesn't last toolong or go too deep.