Slowdown hits venture industry worldwide

Slowdown hits venture industry worldwide

Date added: Thursday, 07 May 2009 16:10

WSJ: Slowdown Hit Venture Industry Worldwide In First Quarter

By Russell Garland

Venture capital investing worldwide was in the doldrums during the first three months of this year as the decline internationally mirrored a 50% drop in the U.S.

Venture-backed companies in Europe, Israel, China and India raised $1.87 billion in 250 deals in the first quarter compared with $3.65 billion in 430 deals a year ago, according to industry tracker VentureSource, owned by VentureWire publisher Dow Jones & Co.

The first-quarter numbers also were down significantly from the fourth quarter of 2008, when investors committed $2.88 billion to 415 deals, as worldwide financial troubles took their toll. Economic uncertainty is causing venture investors everywhere to pay closer attention to their existing portfolios and to be very cautious about new investments.

"There is still lots of surgery going on in portfolio companies to reduce internal costs with the goal of stretching every venture equity dollar as far as possible," Graham O'Keeffe, a London-based partner with Atlas Venture, said in an email.

Europe saw investment decline 35% with $1.18 billion going into 170 deals in the first quarter compared with $1.83 billion into 281 deals in the first three months of 2008. This was the lowest deal count for Europe since VentureSource began tracking it in 2000. It also marked a sharp fall from the fourth quarter when there were 291 venture financings.

The European falloff was across all sectors. More money went into health care than information technology - $406 million versus $362 million. Although information services saw fewer deals than a year ago, the sub-sector recorded a small uptick with 28 in the first period deals versus 23 in the fourth. Software deal count, which had held rather steady in 2008 fell to 34 transactions in the first quarter from 59 in the fourth.

Atlas Partner Fred Destin said he does not expect the second quarter to be any better. "I would venture that most folks not sitting on a new fund have had to shut their investment program until they gain better clarity on reserves; this is the key impediment," he wrote in an email.

His London colleague O'Keeffe said things could get better in the second half. "A lot of maturing companies that have done the hard work in terms of cost cutting and restructuring will start to look more attractive to those venture investors with cash to invest," he said. Furthermore, private companies will look more attractive than public ones to growth investors and M&A activity will shift to smaller deals as corporations look to backfill their R&D pipelines, O'Keeffe said.

The decline in venture investment was bigger in China where investors put $426 million into 34 deals in the first quarter, down 58% from a year ago when $1.01 billion went into 54 deals. The first quarter was much slower that the fourth when $733 million went into 56 deals. Consumer services tumbled from 14 deals in the fourth quarter to 3 in the first.

In Israel, investors put $163 million into 33 deals in the first quarter compared with $661 million into 73 deals a year ago, a 75% decline. India saw the smallest decline from a year ago with $101 million going into 13 deals in the first quarter versus $142 million into 22 deals a year earlier, a 29% drop. But the first quarter was considerably slower than the fourth when $290 million went into 20 financings.