Venture funding stumbles in Q3 2010

After funding in 2009 reached new lows, capital flows into IT again, albeit in smaller chunks

The gloomy days of venture funding as seen in 2009 are gone. But fund flows in the third quarter retreated from their pace this summer.

Venture capitalists injected $5.5 billion into 662 deals for U.S.-based companies in the third quarter of 2010, according to Dow Jones VentureSource. This is down sharply from the $7.7 billion invested in 740 deals, during the second quarter. Compared with the third quarter of 2009, however, the dollar amount of investments dropped just 5%, while the number of deals actually went up by 2%. The median deal size was $5 million, about the same as a year ago.

While the total dollar amount may have dropped year-over-year for Q3, the picture is prettier when we consider the first three quarters together. In 2010, those first three quarters garnered $18 billion over 2,016 deals, 10% more than was seen in 2009.

These numbers confirm trends toward smaller deal sizes. Angels and firms are being stricter (and smarter?) with how much money they dole out, but they are being no less aggressive in seeking out and funding new startups with great ideas.

Angel investors and venture firms are doing deals together more often, too: in the first three quarters, $282 million in 68 deals came from a combination of the two kinds of capitalists, a jump of $46 million and nine deals from the year before.

Predictably, the information technology (IT) industry proved the most popular with investors, raising $1.8 billion in 232 deals, a 35% increase in capital from Q3 2009. Software investments, specifically, increased by 67% to $1 billion across 159 deals.

The Business and Financial Services industry was hugely supported by the “Web-heavy Support services sector,” which Dow Jones VentureSource lists as including advertising platforms, data management services and online marketplaces. While the industry raised a total of $841 million over 121 deals, the most of that money went to the aforementioned sector, which raised $667 million over 94 deals.

Chegg, an online textbook rental service, closed the biggest deal of the third quarter this year, with a $75 million late-stage round, raised from Asia-based firm Ace Limited. Filling out the rest of the top five deals in Chegg's category, Consumer Services, were Inflection ($30.27 million), Angie's List ($22.5 million), ChaCha Search ($20 million), and Eventbrite (also $20 million).

“Enterprise startups have two advantages: customers with capital and a clear path to revenue,” explains Scott Austin, editor of Dow Jones VentureWire. “Corporations are sitting on a lot of cash, some of which will be spent on upgrades and new technologies, and startups targeting the enterprise often have a revenue strategy from the outset, which makes them attractive investment options.”

Though the big guns at hugely popular sites like Facebook and Twitter have sometimes seemed lackadaisical about offering investors a clear strategy for how they would collect revenue, not all startups have the privilege. It’s important to always focus simply on the product and attracting users,

After IT, health care came in a close second with $1.7 billion raised for 164 deals, an 11% drop in capital. Renewable energy also gave a good showing with $359 million raised for 21 deals, a 28% drop in capital.

(image source: https://www.dynamicexport.com.au/wp-content/uploads/2009/05/joint-venture.png)