Total venture capital spending increased 17 percent in the third quarter to more than $4.8 billion, but investments in privately held software companies fell to its lowest level since 1996.
Thanks mainly to its relatively low initial startup costs and its home run potential in the equities market, the software sector for years has either ranked first or second in total VC spending.
But it fell to No. 3 among investment sectors last quarter, according to the latest MoneyTree Report from PricewaterhouseCoopers LLP and the National Venture Capital Association.
Software’s loss was a boon for the biotech, medical devices and clean technology sectors.
Biotech firms, which checked in with the most total dollars garnered in the quarter at $905 million, closed 104 deals in the quarter. In the second quarter, biotech upstarts received a total of $947 million—a 4 percent decrease—but the total number of financing rounds closed surged up 16 percent from 90 deals.
Clean technology, which includes companies focused on alternative energy, pollution, recycling and power supplies and conservation was next with $898 million in VC investments, up an impressive 89 percent from the prior quarter.
Software firms did close the most deals in the quarter (128 rounds) but fell to third place in overall investments at $622 million, down 9 percent in both dollars and deal volume from the $680 million and 141 deals closed in the second quarter.
“The third quarter illustrates a gradual and deliberate industry shift towards a longer term venture capital investment strategy,” said Mark Heesen, president of the National Venture Capital Association. “Venture capitalists are becoming increasingly focused on industry sectors which require multiple rounds of financing for an extended time horizon.”
Heesen said that while the Sand Hill Road crowd is still willing to make steady investments in software companies in the hopes of finding the next VMware or Blade Logic to ignite a frenzied initial public offering, venture capitalists are showing more love and patience for companies and industries that take much longer to develop.
“Companies in areas such as clean technology and life sciences require significant capital and expertise often over a 10- to 12-year period, resulting in more follow on rounds, higher average investment levels and a longer average time to a successful exit,” Heesen said.
“This is not to suggest that the venture capital industry will abandon shorter term IT investment. Rather, the mix of investments will become much more balanced,” he added.
Overall, VCs ponied up $4.8 billion in 637 separate deals, up 17 percent from $4.1 billion in the second quarter although the total number of investments declined 3 percent from 657 rounds.
Internet-specific companies remained very popular, with a total of $843 million invested in 148 separate deals, up 42 percent from the $594 million bestowed in the second quarter. The report assigned a discrete classification to “Internet-specific” companies with a business model that’s fundamentally dependent on the Internet—regardless of the company’s primary industry category.
For every winner, there was a loser.
VC investments in semiconductor companies fell 14 percent from the previous quarter to a 10-year low. Computer and peripherals plunged 40 percent while healthcare services and telecommunications tumbled 57 percent and 17 percent, respectively.
