VC Funding Dips in Q3, but Early-Stage Deals Still Strong

Venture capital funding shrank in the third quarter of 2010 to $4.8 billion, falling by 31 percent compared with the previous quarter. That’s due largely to a decline in cleantechdeals, according to the latest MoneyTree Report from PriceWaterhouseCoopers and the National Venture Capital Association. But the strength in the number of early and seed-stage deals suggests that overall, VCs are still optimistic about the future.

The number of deals dropped to 780 from 962 in the second quarter, a fall of 19 percent, but the total deal flow was 9 percent higher than the same quarter of last year, the report said. The VC industry has generated $16.7 billion in funding this year, putting it on track to eclipse the $18.3 billion of last year if the current trend continues. But hopes that sharp growth in the second quarter signalled a renewed flurry of investment appear to be misplaced. Flybridge Capital Partners’ Michael Greeley said during a conference call that the jump last quarter appears to be more of an “anomaly” at this point.

Early-stage deals accounted for 35 percent of all deals, with $1.3 billion going into 271 investments, while seed-stage funding represented 11 percent of all deals, with $307 million going into 87 companies.  The numbers remained largely steady from the second quarter, when 47 percent of all deals were early- and seed-stage investments. That jibes with data Om reported earlier this week from CB Insights, which found that seed funding accounted for 11 percent of all deals in the third quarter, up from 1 percent in the same quarter a year earlier.

[inline-pro-content] The average seed-stage deal was $3.5 million, compared with $6.8 million in the second quarter, a result of some large cleantech investments in the second quarter. Cleantech, a popular pick in the second quarter, experienced a 59-percent decrease in dollars to $625 million in the latest period, while the number of deals declined by 26 percent to 58. Other sectors also saw losses: Biotech funding fell by 32 percent, and Internet investments were down 25 percent. Software, meanwhile, regained the top spot for industry funding with $1 billion, a 25-percent increase over a year ago, but down 13 percent from the second quarter.

First-time financing remained relatively stable at $1.23 billion, the same as the previous quarter. But first time deals have been growing consistently since the first quarter of 2009, when they accounted for $670 million, which suggests investors are taking bets on new innovations and are relatively upbeat about the future.

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