Venture investing dives 57% in N.E.

Venture capital investing, a key barometer of the entreprenerial economy, unexpectedly tumbled 26 percent to 4.3 billion nationally in the third quarter, from $5.8 billion in the second quarter, according to the latest Money- Tree survey scheduled to be released today.

The decline was especially sharp in New England, the second-largest center for venture-backed start-ups after Silicon Valley. Venture outlays here plunged 57 percent to $426.6 million in the three months ended Sept. 30, from 953.9 million in the previous quarter.

While venture investing typically dips in the July-to-September period due to summer vacations, the size of this year's drop surprised some in the venture capital business. Among the explanations they offered were the struggling stock market, geopolitical uncertainties stemming from the US election and the war in Iraq, and increased financial discipline demanded of the companies being funded.

"You're seeing drives for capital efficiency and smaller fund sizes," said Dave Furneaux, managing general partner at Kodiak Venture Partners in Waltham. "With these trends, the same number of companies might be getting funded for less money."

That may be particularly true in New England, where funding rounds of $4 million to $8 million have become more common and rounds of $50 million to $100 million more rare, Furneaux noted.

He said venture firms in the region now are more likely to break their financing packages into several rounds, offering start-up companies additional "milestone funding" when they have met certain targets or goals.

"New England is probably more conservative about funneling dollars into companies," Furneaux said. "We tend to get more disciplined around the operational controls of our companies earlier.

In New England, we're getting back to basics faster than other regions."

Nationally, third-quarter venture outlays were about even with the $4.3 billion invested in last year's third quarter, while New England's quarterly total was 45 percent below last year's $784.1 million, according to the Money- Tree survey, sponsored jointly by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association.

For the first nine months of this year, US venture investments total $15.3 billion, up from $13.3 billion in the first nine months of last year. Several venture industry watchers said they expected the 2004 totals to exceed the $18.7 billion invested in 2003.

"The industry is trying to find its right size," said John S. Taylor, vice president for research at the National Venture Capital Association, who noted that $4 billion to $6 billion has been invested in each of the past 10 quarters. "Typically, in the third quarter, you may have a lot of discussions underway but not a lot of checks written."

In the third quarter, nationally, 601 companies were funded, compared to 794 in the second quarter.

New England saw 59 companies funded in the third quarter, down from 113 in the second quarter. The life sciences sector, including biotechnology and medical devices companies, pulled in 29 percent of all venture capital in the most recent period, followed by the software industry, which drew 22 percent of the outlays, the telecommunications industry, which drew 10 percent, and the networking industry, which drew 7 percent. Early-stage companies attracted $840 million, 19 percent of all investments.

While financial news in the third quarter was dominated by the initial public offering of Google Inc., the venture-backed Web search provider that raised $1.67 billion, venture capitalists said the Google story was viewed largely as an anomaly in a more cautious market.

"The stock market and the geopolitical environment might have been a bit more sobering than people thought," said Jean-Francois Formela, senior partner at Atlas Venture in Waltham. "People were being cautious, keeping their heads cool, in the third quarter."

Formela said the caution can also be seen in the smaller funds being raised. Over the past three years, he said, venture firms have invested more than they've raised from limited partners, enabling them to chip away at an "overhang" of uninvested money sitting on the sidelines.

Robert Weisman can be reached at weisman@globe.com.