VCs Start the Year With a Whimper

The latest set of figures related to venture capital investing in the U.S. indicates that the growth will continue. But venture firms are battening down the hatches to prepare for a rough 2008, as the number of deals by stage shows a steady rise in late-stage rounds.

Because market conditions were ripe for public offerings of venture-backed startups for only a short time in 2007, there are still plenty of later-stage companies unable to make an exit. Sure, the M&A markets are still going strong, but according to Nina Saberi, a managing general partner with Castile Ventures, valuations are facing a lot of downward pressure.

Castile will continue funding companies with those facts in mind, she noted. In other words, if you’re after a Series C, a big bundle of cash may be hard to find, since M&A is the most likely exit and acquirers are going to be more miserly. That’s a shame, because a bundle of cash is what startups are going to need through any prolonged recession, especially if it stops businesses from buying software and hardware.

The money is still flowing. Venture capitalists invested $7.1 billion in 922 deals in the first quarter of 2008, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. But it was a decline from the $7.5 billion invested in first quarter of 2007 when VCs funded 861 deals. Quarterly investment activity was down as well, falling 8.5 percent from the fourth quarter of 2007, when $7.8 billion was invested in 1,045 deals.

John Taylor, vice president of research with the NVCA, pointed out the deal volumes in the first quarter tend to be lower than those in the rest of the year. As the number of deals done in the fist quarter of this year is still above those of previous years, he’s optimistic that the industry will continues its slow and steady growth, even despite an economic recession.

Most industries received less money than they had in the fourth quarter with 11 of the 16 industries experiencing a decrease in the level of investment and 14 of the 16 experiencing a decline in deal volume. Only semiconductors saw an increase in both the number of deals and dollars, with $556 million invested in 50 deals. Although when asked specifically about the future of mature industries such as chips, Saberi wasn’t as optimistic, saying it wasn’t an area that was good for early-stage investing. Given the expense and technical difficulties that come with designing chips, she’s probably wise to steer clear.