Venture deals rise but cash shrinks

Fewer dollars, more deals.

That was the venture capital snapshot in the second quarter, both in New England and across the nation, according to the quarterly MoneyTree report on venture activity set to be released today.

The number of venture investments climbed to 977 nationally, a six-year high, for the three months ending June 30. That was a 15.6 percent increase over the 845 deals inked in the January-to-March period, the MoneyTree report said. The report is sponsored by the Thomson Financial research firm, the PricewaterhouseCoopers accounting firm, and the National Venture Capital Association.

At the same time, total second-quarter dollar outlays slipped 4.3 percent to $7.1 billion from $7.4 billion in the first quarter.

The story was much the same in New England, again the second-largest region for venture capital after California's Silicon Valley. The number of New England deals surged 39.6 percent to 141 in the second quarter from 101 in the prior quarter. But the money invested in the region's companies tumbled 11.3 percent to $862.4 million in the March-to-June quarter from $972.5 million in the previous period.

Behind the diverging trends was an increase in seed and early-stage financing, which consistently had lagged behind investing in expansion and later-stage companies over the past several years.

"We've got a pretty healthy ecosystem right now," said Paul A. Maeder, managing general partner at Highland Capital Partners in Lexington. "Because of that healthy environment, people are doing more early stage. They're willing to explore the next generation of ideas."

Highland, which set up a 5,000-square foot entrepreneur center to advise potential start-ups, has worked with more than 40 projects over the past 5 1/2 years, 10 of which eventually became companies winning venture funding rounds from Highland.

The return to funding early-stage companies is part of a cyclical trend that is fueling new entrepreneurship, said Mark G. Heesen, president of the venture capital trade group in Arlington, Va. Seed and early-stage deals represented nearly 40 percent of total deal volume in the second quarter, up from 34 percent in the first quarter.

Heesen noted that many venture firms have raised new funds over the past year and a half, pooling capital from limited partners such as pension funds, university endowments, and foundations. As they begin investing these new venture funds, a greater share of the money typically goes to early financing rounds for start-up companies, he said.

"Because so many firms went off and did fund-raising, now they're starting to put that money to work," Heesen said. "And they're putting it to work in early-stage investing. They want to get in early and ride these young companies all the way to initial public offerings."

With a pickup in IPO activity, especially in traditional high-tech sectors like software and information technology, venture investors have been more willing to fund companies that have been less attractive in recent years than biotechnology, medical gear, or other life sciences businesses. Software, telecommunications, and biotech start-ups in New England all raised funds in the second quarter.

Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, said many venture firms have been reluctant to invest in early-stage companies until they had liquidated portfolios of companies they'd backed during the dot-com bubble early in the decade. At this point, many of those companies have been shut down, sold, or merged with other businesses, he said.

"It's a good time to be a start-up again," Lefteroff said. "A lot of deals are getting looked at. There's an abundance of money. And there's a lot of talent out there's that's looking for the next hit."

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