Slowdown of economy is taking toll on VC business

Venture capital funding dropped more steeply in New England than the nation as a whole in the first three months of 2008, as the slowing economy began taking a toll on entrepreneurial companies, according to the MoneyTree first-quarter report being released today. In the six-state region, the second-largest US venture hub after Silicon Valley, investments fell 24.1 percent to $721.4 million in the January-to-March period from $951.1 million in the prior quarter. It was the smallest outlay in New England since the second quarter of 2006. Nationally, venture outlays dropped 8.5 percent to $7.1 billion in the three months ending March 31 from the $7.8 billion invested in the previous quarter. First-quarter US investment totals were the smallest since the fourth quarter of 2006, according to the report prepared by the Thomson Reuters research house and the PricewaterhouseCoopers accounting firm for the National Venture Capital Association. "We see from early-stage investments that the economic slowdown has had an impact," said Nina Saberi, managing general partner for Castile Ventures, a Waltham venture capital firm. She cited an inhospitable climate for initial public offerings and a tougher market for acquisitions, two routes for cashing out of investments. But the outlays, while lower, remained in line with the $7 billion-plus level seen in each of the past five quarters as venture capitalists put money to work funding innovative companies. At least some of the decline appeared to be seasonal. Investment totals are typically lowest in the first quarter and highest in the second and fourth quarters, said John S. Taylor, vice president of research at the venture association. "Venture capitalists are still investing in new projects now, though with a sense of caution," Taylor said. Still, the trend was clearly downward. There were 922 financing deals in the quarter nationally, down from 1,045 in the fourth quarter of last year. There were 108 deals in New England, down from 118. Eleven of the 16 industry sectors tracked in the MoneyTree report drew fewer dollars, and 14 of the 16 saw fewer funding deals. Biotechnology attracted more venture money than any other sector in the first quarter, with $1.27 billion flowing into 126 deals. A close second was computer software, with $1.26 billion funding 234 deals. But outlays for both sectors, along with industrial and energy, clean technology, and Internet-specific investments, all tumbled from fourth-quarter levels. Two sectors that drew higher venture outlays in the first quarter were semiconductors and medical equipment. Funding for early- and late-stage companies declined in the first quarter, though funding rose for expansion-stage companies. James E. Thomas, partner at Thomas, McNerney Partners, a Stamford, Conn., venture firm focusing on healthcare and medical technologies, said venture capitalists are resigned to managing their portfolio companies more conservatively and for longer periods before they can "exit" by going public or selling to larger companies. He also warned of a regulatory environment that "is uncertain and frankly trending toward more regulation rather than less regulation," potentially souring the outlook for healthcare and medical start-ups. But with many venture firms still sitting on large pools of cash from limited partners such as pension funds and university endowments, this may simply be a period when investors are being more patient and selective, suggested Kevin Shaw, partner in charge of the Cambridge entrepreneurial services center for PricewaterhouseCoopers. "Given the economy we're in now, these are still pretty good results," Shaw said. "Venture capital firms know they have to stay in the game longer. So the investments today might be a little more conservative and selective, but they're not falling off a cliff."