The State of Play in Silicon Valley Venture Funding - Clouds on the Horizon?

I went to a session the other day to get the update on PriceWaterhouse Coopers quarterly "MoneyTree" VC funding trend report and thought you'd be interested in some of the observations. If you're in the Valley and likely to be raising money you need to know what's going on out there. So here's the update for Q4 2009 and the year as a whole:

• In Q4 about $5.0Bn was invested in almost 800 deals - a dollar amount in line with Q3 and about 100 more deals being done.
• For the year 2009 a total of $17.7Bn was invested in startups by VC's - the lowest since 1997 and $10Bn less than in 2008.
• 38% of the Q4 number, and 40% of the full year, was invested in Silicon Valley companies, with an additional 15% and 10% respectively in the rest of California. So CA-based businesses account for about half of all U.S. VC investing. By comparison in 2009 just 8% was invested in the NY Metro area and 12% in New England (Boston).
• The number of Valley deals done in Q4 was around 260 - better than any quarter since Q3 2008 and on a par with the rate of deals getting done in 2006
• Early stage (Series A rounds) bounced back in the Valley in Q4 after a dry Q2 and Q3 - good news for newer startups.

Despite the efforts of many regions to create startup hubs and try and replicate the Valley, the share of funding taken by startups in Silicon Valley has been increasing steadily from 23% in 1995 to the 40% mentioned above in 2009. 

Sounds like we're turning the corner on the pace of investment and that the Valley continues to lead the geographical pack substantially. However, if you just pay attention to the dollars you miss a big theme - which is that the bulk of the money gets sucked up by the major capital-intensive segments in the Valley. These are Biotech, Medical Devices and Cleantech. If you're in those businesses you need lots of capital to develop products, gain regulatory approvals and so on - and the good news is that they were getting funded. The growth of these sectors is also a key element in the increasing SV share of funding I noted above. You don't have to go back far to remember the days when the number of companies in those sectors could be counted on the fingers of one hand - Genentech (now wholly-owned by Roche), Acuson (now Siemens) and a few others. And of course Cleantech, as such, didn't exist at all. The diversification of the Valley away from semiconductors, computer and then networking equipment manufacturing towards these newer, major segments has been a huge boon and, again, evidence of the ability of the Valley to reinvent itself time and again.

All that said, the software/internet space still had 177 companies funded in Q4 in the Valley for almost $1Bn (one third of the 2009 total) and the number was a 22% increase over Q3 of 2008. In 2009 as a whole the 619 software/internet companies funded was a 40% decrease vs. 2008. So Q4 was a good exit to the year in this segment. And its still clear that, despite the ease with which many startups in Internet, Social Media, Software etc can get started pretty much anywhere, the majority still get started and grow here, in Silicon Valley.

So where does that leave us? Well, things are definitely better than a year ago. However the panel discussing the results was largely gloomy about the outlook. And not just for this year, but particularly for 2011. In my next post I'll summarize the panel's opinions and add some of my own. Its enough to say that if you can get funded this year then take as much as you can while you can because the longer term has many clouds forming ...