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Thursday, January 22, 2009

Venture Funding Falls 30%

As posted by: Wall Street Journal

Venture-capital investment dropped 30% in the fourth quarter to its lowest level since 2005, as the financial crisis threatened to cut off more funding for start-up companies.

In total, $5.5 billion was invested in private companies in the U.S. during the fourth quarter, down from $7.9 billion a year earlier and the lowest quarterly tally since 2005's first quarter, according to new data from research firm VentureSource. (VentureSource is owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.) Just 554 venture deals were completed in the quarter, down from 718 a year earlier.

Venture capitalists typically put money into start-ups in sectors such as technology and health care, aiming to profit when the firms go public or are sold.

But venture-capital firms are pulling back now as the economy struggles to get back on track. "Very few new deals are getting done, and a lot of people are trying to make sure their portfolios are protected," says Faysal Sohail, a venture capitalist at CMEA Ventures in San Francisco, who says his firm has slowed its investment pace.

The venture business has been hit hard because the sector's routes to returns -- initial public offerings of shares and mergers-and-acquisitions activity -- have been all but shut down by the market's gyrations. In addition, some institutional investors have become gun-shy about investing in venture capital amid the downturn.

In particular, technology start-ups had their worst investment quarter since 1998, with just $2.2 billion invested in 266 tech-venture deals in the fourth quarter, off 39% from the $3.6 billion invested in the year-earlier period, according to VentureSource. Within the tech sector, investment in software start-ups fell to the lowest level since the first quarter of 1997.

Venture investment in health-care start-ups dropped to the lowest level in three years in the fourth quarter, with about $1.5 billion invested in 137 deals.

For all of 2008, there were 2,550 venture deals totaling $28.8 billion in investments, down from 2,823 deals totaling $31.4 billion in investments in 2007, says VentureSource.