U.S. Venture Capital Investment Stable but Capital Growing Scarce for Earlier-stage Companies

While the overall figures seem encouraging, a much higher percentage of investment is being targeted at late-stage, rather than early-stage, companies and to firms based in Silicon Valley and not the rest of the country. This trend could mean trouble for new capital-seeking companies outside of the Bay Area.

Software companies continue to represent the leading sector for venture investment with $1.25 billion in 219 deals during the second quarter. While biotechnology companies received the second-highest number of deals, the industrial/energy sector took over the second place spot in venture dollars for the first time since the second quarter of 2003. Both deals and dollars dropped in the biotechnology sector, which, along with a similar fall in medical device deals, represents a 14 percent drop in dollars for the life sciences sector. The semiconductor industry also experienced a drop, falling to its lowest level of investment since 2001. Cleantech and Internet-specific companies, however, continue to grow in importance as targets for investment. Two cleantech deals were the largest individual investments of the quarter, together totaling $247 million.

Investment in the Silicon Valley region has benefited from a growing preference for safer, later-stage deals on the part of venture capital firms. Last quarter, the number of dollars invested in companies seeking their first round of capital fell 12 percent. First-round financing made up just 21 percent of total venture investment, the lowest share since 2004. While early-stage investment remained even and expansion-stage investments fell by 15 percent last quarter, later-stage deals rose 14 percent. Silicon Valley is home to many of the more mature companies and has increased its percentage of national venture dollars as investors attempt to avoid the costs and risks of investment in early-stage companies, especially in the current economy.