Silicon Valley Frontlines: State of the Market

PriceWaterhouse Coopers recently released their first quarter 2009 MoneyTree survey of venture capital investing. Not a pretty sight, as we'd all expected. In fact, with a total of $3.0Bn raised, it was the lowest quarter for funding since 1997 (a year that was then rapidly eclipsed in the inflation of the dot.com bubble)

However there are some - including the experts from PWC - who think that this is likely to represent the low point of 2009 as VC's and startups adapt to the new market realities and get things back on track, however modestly.

I think the main lessons from Q1 are:

Investors have retrenched and refocused, and are being far more discriminating about what they're funding and why. No surprise there!
Software and Internet-related businesses tend to be even more favoured (less disfavoured?) in hard times - they are less capital intensive, require far less money than some to get to be self sufficient (ie: less need to find additional monies later), and carry far less risk for an investor.
Despite all the declines its still better to be a seed or early stage startup looking for money than someone looking for expansion or growth funding. Might seem a little counterintuitive but good ideas are still getting funded and investors are willing to take some chances there and with later stage businesses with proven records. But if you're in the middle - still trying to grow and prove the business is scalable etc then you really have your work cut out.

Here are some of the key data. By market sector:

Software funding totaled $614m - a drop of 42% compared to Q4 2008. 138 companies received funding.
Internet-related companies raised $556m for 123 deals, a 31% decrease in dollar terms. Funding sizes were also smaller on average.
Life Sciences investments were down 40% with $989m going into 133 companies.
Clean Tech in general took a big hit - an 84% decline to $154m
Telecoms (down 72%), Networking and Equipment (down 47%) and Media/Entertainment (down 45% were all badly hit
Surprisingly, Financial Services actually showed a funding increase - up 26% with $108m invested. Of course the fourth quarter would have been pretty bad for that sector!

Life sciences fundings tend to be larger due to the longer time horizons for product development and the greater capital required than for software. Clean Tech is not only highly capital intensive but the decline in oil prices and overcapacity in some sectors (solar panels for example) is causing a further pullback in investment. Telecoms and Networking tend to be capital intensive and have longer development cycles, and therefore less in favour with investors from a risk-management perspective. Media - really advertising and related plays - continue to be out of favour as that sector consolidates and retrenches .

By stage of development:

Seed and early stage investments were down 45% to $852m, and average deal size was $3.6m for seed and $4.3m for early stage (pre-Series A). These accounted for 37% of total financing in the quarter
Expansion stage financings declined a whopping 60% to $820m and average deal size also declined substantially - from $7.5m to $5.6m - and contributed 27% of deals done
Later stage deals fell 35% to $1.3Bn and average deal size also declined from $8.1m to $6.7m

First-time financings - regardless of stage dropped 48% to $596m and comprised 20% of the total dollars invested. Software companies were among the bigger recipients and seed/early stage companies received 59% of all the first-time money and accounted for 70% of the number of deals.