VC investing falls for 2nd straight quarter

Private investments fall 7% from last year, with sharp pullback in Web 2.0 startups

Just as investors have lost faith in public market investments, venture capitalists lack confidence in putting money to work at startups. In the third quarter, VCs invested $7.37 billion into 583 deals, down 7% from a year ago, when nearly $8 billion went into 673 deals, according to the Quarterly U.S. Venture Capital Report from Dow Jones VentureSource. The annual decline also marks the second quarter in a row, in which VC investments have dropped.

“Clearly, the current economic crisis is already impacting the venture industry, which has traditionally been relatively insulated from fluctuations in the broader economy,” said Jessica Canning, Director of Global Research for Dow Jones VentureSource, in a release. “With the IPO market likely to be shut down for some time, venture capitalists are pulling back on investments in technology companies as well as in areas like business and financial services and media, content and information that are likely to suffer from a decline in advertising and enterprise spending."

The consumer Web services industry saw investments slashed by 47% to $151 million from $286 million last year. Only 20 startups were funded in the third quarter, down from 32 in the same quarter last year. For the first time in nearly three years, the information services sector, which includes many Web 2.0 companies, saw a drop in investments as VCs invested $501 million in 64 deals, down 11% from $561 million in 83 deals, in the third quarter of last year.

On the positive side, investments in utilities and energy reached a record high of $1.18 billion in 32 deals, up 90% from last year. Renewable energy, such as solar-related companies, received the lion's share of the funding.

Meanwhile it appears VCs prefer to put money to work in later-stage companies. Seed-roud financings dropped to two-year lows as $1.3 billion was invested in 203 startups. Second and later-stage rounds accounted for 82% of all the investments.