Biotech draws lion's share of shrinking venture dollars
Biotechnology edged out computer software as the industry sector attracting the most venture capital in the third quarter, as overall venture investments dropped by 8 percent from the previous quarter, according to the MoneyTree survey released yesterday.
Venture outlays for both sectors declined in the three months ending Sept. 30, though biotech investing dipped only 5 percent while software investing tumbled 19 percent from the prior three months. That left biotechnology with $1.14 billion in venture money for the most recent period, outdrawing the $1.09 billion corralled by software firms.
Software had been the top magnet for venture capitalists every quarter for the past decade, except for the third quarter of 2003 when biotechnology briefly led the pack, according to the quarterly MoneyTree report. The report is sponsored jointly by the PricewaterhouseCoopers accounting firm, the Thomas Financial research house, and the National Venture Capital Association, a venture industry trade group.
But technology and business model disruptions, notably the gains of open source software, may be damping the appeal of traditional enterprise and infrastructure software start-ups, said Axel Bichara , a senior partner at Atlas Venture in Waltham. "We think that's a normal trend as an industry matures and consolidates," Bichara said.
As software declines, venture investors are looking with favor to new sectors like Internet-oriented companies, which raised $1.1 billion in the third quarter, a four-year high, and alternative energy, which raised $274 million. Within the life sciences space, the fastest growing sector was medical devices, where investments increased to $639 million. The growing interest of venture capitalists in Internet and digital media start-ups in the July-to-September period was affirmed early this month with Google Inc.'s $1.65 billion deal to acquire Internet video phenomenon YouTube, a deal likely to inspire more investment in the sector.
Overall venture outlays were $6.2 billion nationally in the third quarter. While that represented an 8 percent decrease from the second quarter, when investments totaled $6.7 billion, it was 11 percent higher than the $5.6 billion in investments put out in the third quarter of 2005. And it marked the third consecutive quarter where venture capitalists invested more than $6 billion in entrepreneurial start-ups.
The number of companies raising venture money in the third quarter slipped to 797 nationally, from 907 in the second quarter.
In New England, again the nation's second-largest venture hub after Silicon Valley, third-quarter investments totaled $578 million. That marked a decline of 22 percent from the $742 million invested in the region's start-ups in the second quarter and a 10.6 percent decrease from the $646.4 million invested in the third quarter of 2005.
Todd Dagres , general partner at Spark Capital in Boston, said venture investment has flattened in New England's traditional areas of technology strength, like enterprise software, network infrastructure, and telecommunications equipment and services. At the same time, investments have been climbing in new media and consumer-oriented technologies, fields where New England has been lagging, he said.
"There's still a lot of venture capital money managed out of New England," said Dagres. "The problem is that the money is being exported to Los Angeles, San Francisco, and other parts of the country" where technology start-ups raise funds from Boston-area venture firms.
The convergence of digital media and the shifting of video content to mobile devices and "on demand" business models are two trends that are likely to guide venture investing in coming quarters, Bichara suggested. "There's an opportunity to invest in the disruption of traditional business models," he said. "We think we have at least a decade of strong investment opportunity in digital media before us."
Robert Weisman can be reached at weisman@globe.com. 
