U.S. Economic Troubles Lead to Drop in 2008 Venture Capital Activity

Geographic Concentration Continues as California Share Grows, SSTI's VC Dashboard Shows
U.S. venture investment experienced its first yearly decline since 2003 last year, according a recent PricewaterhouseCoopers and National Venture Capital Association (NVCA) MoneyTree Report. The report finds that total investment dollars dropped eight percent in 2008, while deal volume decreased by four percent. A press release accompanying the announcement cited market insecurity and a slowdown in exits for the fourth-quarter declines that led to the lower numbers.

Those losses were not equally spread out around the country. California, by far the nation's largest venture capital market, made modest gains in invested dollars and only a slight decrease in the number of deals. Firms invested more than $14.2 billion in the state last year in 1,552 deals. Though these figures only account for a 3.34 percent increase and a 1.33 percent decrease respectively, in the current economic climate they represent a substantial uptick in California's national venture influence. As of 2008, the state accounts for more than half of the nation's venture investment (50.41 percent), up from 45.64 percent in 2007. Over the past decade, California has gradually increased its share of national investment from about 40 percent to about 50 percent. Last year marks the largest single year increase in California's share of national venture capital investment on record.

Other top venture markets that had a good year in 2008 include Colorado, New York, Ohio and Hawaii. A few top-tier states had mixed results. Arizona, Minnesota and Virginia saw an increase in their number of deals, but a decline in total dollars invested. Connecticut, Georgia and Pennsylvania, had the opposite situation, with more deals but fewer dollars. Most other high-profile venture capital states, however, experienced declines in both investment dollars and in their national share of investment. Massachusetts, Texas, Florida, Maryland, the District of Columbia, North Carolina, Washington, Oregon, and Illinois all took hits. 

For a state-by-state breakdown of venture capital data based on the PricewaterhouseCoopers/NVCA data, visit SSTI's Venture Capital Dashboard at: http://www.ssti.org/vc.

Several smaller states posted big gains. Vermont had an active year, while Montana, Iowa and Nebraska experienced gains due to a few large deals.

PricewaterhouseCoopers and NVCA pointed out several other bright spots in the generally discouraging data. While a drop in later-stage investment drove the decline in fourth-quarter numbers, early-stage investment remained strong and seed-stage investment reached its highest point since 2000. Seed- and early-stage deals represent a growing share of overall deal volume.

Also, the clean technology sector continues to thrive despite the downturn. Seven of the ten largest deals in 2008 were in this sector. Investment in clean technology grew by 52 percent in dollars and 16 percent in deal volume.

Overall, however, the U.S. venture capital market appears to be entering a difficult period. In a recent NVCA survey, 90 percent of investors said they expect the market to slow down even more in 2009. More than half believe that investment will decline more than ten percent from the 2008 numbers. Most unfortunately for entrepreneurs, nearly all respondents predicted that capital would be harder to obtain for new companies in the coming year.

Read the Moneytree Survey press release at: https://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/08Q4_MT_Release_FINAL.pdf.

View the results of the NVCA Survey at: http://www.nvca.org/pdf/09PredixRelease.pdf.