Venture investing rises 5.5% in state
US total drops 0.8% during 2d quarter
US venture capital funding slowed in the second quarter as investors diverted a record sum of money into backing late-stage companies that are having trouble going public or being acquired, according to the MoneyTree report being released today.
Venture investments nationally slipped 0.8 percent to $7.38 billion in the second quarter of this year from $7.49 billion in the first quarter, the report said. It was the first time since 2002 that outlays to entrepreneurial companies declined in the second quarter, traditionally a robust time for bankrolling start-up companies.
Investment activity was stronger in New England, the nation's second-largest venture hub after California's Silicon Valley. Venture capital firms here plowed $822.8 million into start-ups in the three months ended June 30, a 5.5 percent increase from the first quarter.
The quarterly MoneyTree report was prepared for the PricewaterhouseCoopers accounting firm and the National Venture Capital Association trade group by research firm Thomson Reuters.
While overall funding was largely flat in the second quarter, there were 318 later-stage deals totaling a record $3.1 billion, suggesting venture capitalists were putting more money into mature companies that in past years might have been ready for initial public offerings or sales to larger technology and life sciences buyers.
But with the IPO window shut - there were no public offerings nationally in the second quarter, and only five in the first quarter - and the mergers and acquisitions market also showing signs of strain, venture firms are devoting more time and attention to sustaining later-stage companies at the expense of early-stage investments.
Industry professionals yesterday likened the situation to parents who discover they will have to pay for their chil dren to attend graduate school after college before they'll be ready to enter the workforce.
"VCs are forced to keep their college kids on their dime for a little longer," said Trevor Loy, managing partner at Flywheel Ventures in Santa Fe, which backs high-tech and sciences start-ups.
The situation is aggravated by financial problems in the pharmaceutical industry, suggested Fred Craves, founder of Bay City Capital, a San Francisco venture firm that funds biotechnology and life sciences companies. Craves said pharmaceutical giants like Pfizer Inc. and Merck & Co., which historically have acquired start-ups, are currently on the sidelines attending to their own operations.
In such an environment, start-ups are fetching less than they might have in the past. "Anyone selling a company in this market today should expect to accept some dilution," Craves warned.
The average deal size in the second quarter fell to $7.5 million from $7.7 million in the first quarter, indicating investors may be more cautious. But for the sixth consecutive quarter, venture firms invested at a level totaling more than $7 billion, betting the market for so-called "exits" - IPOs and acquisitions - will eventually rebound.
"There's still a lot of good companies in a variety of industries getting funded," said Kevin Shaw, partner in charge of the Cambridge entrepreneurial services center for PricewaterhouseCoopers. "VCs are working with emerging companies and they're willing to stick it out."
Second-quarter investments in New England start-ups were boosted by several larger deals: $50 million to Powerspan Corp. of Portsmouth, N.H., which is developing clean-energy technology for coal-fired power plants; $41.8 million to Gloucester Pharmaceuticals Inc. of Cambridge, which is commercializing clinical-stage oncology drug candidates; and $41.7 million to Turbine Inc. of Westwood, which is creating massively multiplayer role-playing Internet games.
The two largest funding deals nationally - $132 million for OptiSolar Inc. of Hayward, Calif., and $115 million for BrightSource Energy Inc. of Oakland - were in the energy sector.
Shaw, of PricewaterhouseCoopers, said venture outlays for industrial and energy start-ups, which climbed in the second quarter even as funding for software and biotechnology companies slid, are becoming a more important part of the New England mix. "We are certainly seeing more clean-energy companies, and obviously that industry's exciting for us," he said.
Robert Weisman can be reached at weisman@globe.com.
