Capital Chaos

PriceWaterhouseCoopers released their MoneyTree Report which provides some great insight into deal flow both in terms of dollars, stages and geography.  The report is a sate of the union for transactions and the Q3 2007 report provides some interesting data.

According to the report, there was $7.1B invested in 887 deals in Q3.  While the investment activity was down from the previous quarter ($7.2B) it was significant enough to make anyone worry about a shift in deal flow.  Aside from Industrial Energy, the Internet sector was a notable increase.

When looking at the investments by industry, Software still remained in the number one spot barely edging out biotech.  Industrial Energy still remains hot and Financial Services has seen strong interest over Q2 with the recent attention of the FirstData LBO and VC’s seeing opportunity in the payments space with an increasing number of alternative processing solutions starting to hit the market.  Healthcare and Retail seem to be the most unattractive markets for the past year along with Computer Peripherals with the market being so difficult to penetrate and being run by two giants (Apple, Dell).

What will be interesting to see is how Q4 turns out.  If history is a good baromoter, I would expect a down quarter but the more important figures will come for Q1 of 2008.  If there is a downward trend in that quarter, then we can expect 2008 to potentially be a rough year for companies seeking venture funds.  As the chart shows, when we saw the bubble burst in ‘01, we had 9 consecutive declining quarters.  2007 has been the first year to see consecutive declining quarters starting with Q1 since 2001 which is why the first qaurter of 2008 is so important.

Investments by sequence of financing remained almost the same at $1.7B but the difference was that there were less first time deals in Q3 (273) than in Q2 (347) making the average deal $6.3M which is still pretty healthy.  According to the report, Seed/Early stage companies received the bulk of first time investments garnering 45% of the dollars and 69% of the deals.

Silicon Valley still remains the hot bed for dollars capturing nearly 35% of the $7.1B distributed in Q3.  New England still remains strong as does Texas (mostly the Austin area) but New York Metro Area continues to remain far behind the leader.

As one might expect from the report above, the vast majority of deals came from firms in the Silicon Valley. Draper Fisher ( Menlo Park, CA) topped in at 21 deals with Kleiner Perkins (Menlo Park, CA) facilitating 18 deals in Q3.  New Enterprises (Baltimore, MD) continues to remain active with 20 deals and Bessemer Ventures (Larchmont, NY) also had a solid quarter with 13 deals funded.  It’s interesting to note that the most active venture investors really reside in Silicon Valley and the Boston areas.  With the increasing interest in both web based technologies and biotech, I don’t see this trend breaking into 2008.