VC Investing Slows in Q1

Justin Hibbard

Ten days ago, I predicted that VC investment in the first quarter would be up significantly from a year ago and the previous quarter. Today, researcher VentureOne released its numbers and I was...WRONG! That is, if you believe the numbers. The good people at VentureOne, Ernst & Young, Thomson Venture Economics, PricewaterhouseCoopers, and the National Venture Capital Assn. (what a mouthful) do an admirable job of tracking VC deals. But as I and others have noted, VCs say they are disclosing fewer deals than before.

Anecdotally, VCs confirm that dealmaking in the first quarter was way up. "January through March was white hot," says Nick Sturiale, a VC at Sevin Rosen Funds. Yet VentureOne reports that the number of deals and amount invested fell 9% and 16%, repectively, from a year ago to 474 deals and $4.6 billion in the first quarter of 2005. The numbers from Thomson et al come out tomorrow.

A few details to highlight in the VentureOne numbers:

* Early-stage deals are on the rise. They comprised 32% of all deals in Q1, compared to 30% in Q4. The amount invested in early-stage companies, $235.2 million, was the highest since the fourth quarter of 2000. It seems VCs are wasting no time putting all the new funds they've raised to work.

* Communications deals are making a comeback. There were 68 of them in Q1, up from 42 a year ago. VCs invested $605.2 million in the sector from January through March. I've been hearing a lot lately about a renaissance in the communications sector, particularly with regard to the number of qualified IPO candidates. Are lots of startups being formed in this area too?

* Health care deals are down. The number of deals and amount invested declined 20% and 39%, respectively, from a year ago. Early-stage have dropped off especially, suggesting fewer new companies are being formed than last year.

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