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Venture Investment in Clean Technology Accelerates Significantly in 2008


MasketWatch
January 24, 2009


Funding for Seed Stage Companies Increases Amidst Lower Overall Investing Levels

Venture capitalists invested $28.3 billion in 3,808 deals in 2008, marking the first yearly decline
of total investments since 2003, according to the MoneyTree Report by
PricewaterhouseCoopers and the National Venture Capital Association (NVCA),
based on data from Thomson Reuters. Venture investments in 2008 represented an 8
percent decrease in dollars and a 4 percent decrease in deal volume from 2007.
Investments in the fourth quarter of 2008 totaled $5.4 billion in 818 deals, the
lowest amount of dollars invested since the first quarter of 2005 and a 26
percent drop from the $7.3 billion invested in the third quarter of 2008.
The decline in investments over the prior year is spread across industries and
stages of development, with some notable exceptions. Dollars invested in the
Clean Technology sector grew more than 50 percent in 2008. Companies in the Seed
Stage of development also received more money in 2008, reaching the highest
level seen since 2000.

"As we emerge from an extremely difficult year, the venture capital industry is
holding its own and taking steps to adjust to the new reality," said Mark
Heesen, president of the NVCA. "The quarterly decline in investment was not
unexpected as market uncertainty took its toll on venture activity. Venture
capitalists are being cautious with their dollars which, in this environment, is
the right strategy. We are encouraged by the strength of the Clean Technology
sector which continues to grow at a considerable rate. The stability of Seed and
early stage deals as a percentage of total deal volume suggests that venture
capitalists are continuing to fund very young companies, giving credence to the
philosophy that an economic downturn is a time ripe with opportunity."

Tracy Lefteroff, global managing partner of the venture capital practice at
PricewaterhouseCoopers LLP, observed, "Even though we saw a significant drop in
funding during the fourth quarter, we still note that the $28 billion invested
in 2008 is the fifth highest annual investment total in the 14 years the
MoneyTree Report has been tracking venture capital. At this point, venture
capitalists are doing what everyone else is doing -- assessing and reassessing
their capital outlays and each and every investment carefully in order to make
prudent decisions on what companies have the brightest outlook for the
long-term. The silver lining is that history has proven that true innovation can
surface under very challenging circumstances."

Sector and Industry Analysis

The dip in fourth quarter investing impacted virtually all industries, with the
majority of sectors experiencing double-digit percentage declines in both
dollars and deals. The Life Sciences sector (Biotechnology and Medical Device
industries together) dropped 15 percent in 2008 to $8.0 billion, compared to
$9.3 billion invested in 2007. However, the number of Life Sciences deals did
not experience as big of a decline, dipping only 3 percent to 853 deals in 2008
from 883 deals in 2007. The declines were more pronounced in the fourth quarter
of 2008, with dollars going into the sector dropping 33 percent from the third
quarter to $1.6 billion and the number of deals dipping to 185, a 22 percent
drop from the prior quarter. For the year, Life Sciences accounted for 28
percent of all venture capital invested and retained its position as the number
one investment sector for 2008.

Software investing dropped in the fourth quarter to $1.0 billion, the lowest
quarterly investment level in ten years. The number of deals also declined to
194, the fewest Software companies funded since the second quarter of 1997. The
annual declines were much smaller with $4.9 billion invested into 881 companies
in 2008, representing declines of 10 percent and 7 percent, respectively, from
2007. For the year, Software remained the largest single industry category both
in terms of deals and dollars.

The Clean Technology sector, which represented seven of the ten largest deals of
the year, experienced significant growth in 2008 with $4.1 billion invested in
277 deals. This investment level represents a 52 percent growth in dollars and a
16 percent growth in deal volume over 2007 when $2.7 billion was invested in 238
companies. Clean Technology investing accounts for 15 percent of all venture
capital investing in 2008 compared to 9 percent in 2007. In the fourth quarter,
venture capitalists invested $909 million into 62 deals, a 14 percent drop in
dollars and 19 percent drop in deals from the third quarter of 2008 when $1.1
billion went into 77 deals. Clean Technology crosses traditional MoneyTree
industries and comprises alternative energy, pollution and recycling, power
supplies and conservation.

Venture investment in Internet-specific companies of $4.9 billion going into 851
deals in 2008 was relatively flat from 2007 when $5.0 billion went into 825
deals. For the fourth quarter, Internet specific investment fell 26 percent in
terms of dollars and 20 percent in terms of deals with $787 million going into
170 deals compared to $1.1 billion going into 212 deals in the third quarter of
2008. 'Internet-specific' is a discrete classification assigned to a company
whose business model is fundamentally dependent on the Internet, regardless of
the company's primary industry category. These companies accounted for 17
percent of all venture capital dollars in 2008, approximately the same
percentage as in 2007.

The Media & Entertainment industry increased 3 percent to $2.0 billion going
into 407 deals in 2008, an increase of 9 percent from the prior year.
Investments in IT Services also jumped in 2008, rising 17 percent in 2008 to
$1.8 billion invested into 262 deals, a 16 percent increase from 2007. Both
Telecommunications and Semiconductor investing, both at $1.7 billion fell to 11-
and 6-year lows, respectively.

Stage of Development

Investments into Seed Stage companies increased substantially in 2008, jumping
19 percent from the prior year to $1.5 billion going into 440 companies,
compared to $1.3 billion going into 450 companies during 2007. This marks the
highest annual total of dollars captured by Seed Stage companies since 2000.
Early Stage investments remained relatively flat in 2008 with $5.3 billion going
into 1,013 deals, compared to $5.5 billion invested into 1,036 deals in 2007.

Investments in Early Stage companies dropped 3 percent from the prior quarter to
$1.3 billion in the fourth quarter going into 240 deals, a 4 percent drop from
the prior quarter. Despite the drop in investing during the fourth quarter, the
percentage of total deals in Seed and Early Stage investments combined was 29
percent in 2008, up from 25 percent in 2007.

In 2008, $10.8 billion was invested into 1,177 Later Stage deals, declines of 13
percent and 3 percent, respectively. For the fourth quarter, $1.8 billion went
into 235 deals, which represent declines of 38 percent and 23 percent,
respectively, from the third quarter of 2008. They accounted for 34 percent of
all deals in the fourth quarter, down from 40 percent in the prior quarter.

Expansion Stage investments decreased in 2008 with $10.6 billion going into
1,178 deals, drops of 9 percent and 6 percent, respectively, from the prior
year. Expansion funding plunged in the fourth quarter, dropping 25 percent to
$2.0 billion from the prior quarter. The number of deals also fell during the
quarter, declining 6 percent to 257, down from 273 in the third quarter of 2008.
Expansion Stage deals accounted for 37 percent of the total deals in the fourth
quarter of 2008 compared to 36 percent in the third quarter.

First-Time Financings

First-time financings dollars dropped in the fourth quarter to $1.1 billion,
down 28 percent from the prior quarter, the lowest level invested since the
first quarter of 2004. The number of companies receiving venture capital for the
first time in the fourth quarter also dropped by 17 percent from the prior
quarter to 236, the lowest number in three years. On an annual basis, the
declines were smaller with dollars dipping 18 percent to $6.1 billion and the
number of deals only dropping 10 percent to 1,171 companies receiving funding
for the first time in 2008.

Industries receiving the most dollars in first-time financings in 2008 were
Industrial/Energy with 149 deals valued at $1.2 billion, followed by Software
with 240 deals for $903 million and Biotechnology with 127 deals for $834 million.

Fifty-seven percent of first-time financings in 2008 were in the Seed/Early
Stage of development, followed by Expansion Stage companies at 27 percent and
Later Stage companies at 16 percent.

 

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