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Venture capital investors say a recovery is under way for the startup economy, and New England is taking part, despite reports released over the past week showing the region lagged behind the nation overall in a second-quarter reversal of venture dollars’ yearlong downward trend.
Nationwide, across all sectors, venture-backed companies took in $5.27 billion in Q2 2009, spread across 595 funding deals, Dow Jones VentureSource reported on July 18, representing a “rebound” over Q1’s dismal $4 billion invested. Days later, the National Venture Capital Association, in partnership with PricewaterhouseCoopers LLC, reported a more modest increase, to $3.7 billion, over the $3.1 billion they reported in the first quarter.
Regardless of the discrepancy — the two organizations use different methodologies — both reports showed the first positive move for VC dollars since the second quarter of 2008. New England Venture Capital Association chairman Michael Greeley, a partner at Flybridge Capital Partners, said there is reason for optimism.
“I think the worst is clearly behind us,” Greeley said. The fourth quarter of 2008 and the first quarter of 2009 froze the venture industry, as investors set up a triage for portfolio companies. Now, he said, “People have figured out what they’re going to do across their existing portfolios. The level of activity will be on a nice modest increase. It won’t be buoyant again.”
However, VentureSource numbers showed less cause for celebration in New England, where venture investment in homegrown startups increased only slightly, from $629.2 million in Q1, to $640.1 million in Q2.
New England’s venture recovery may not take a V-shape, but it will take place and it will be more robust than in other areas of the country, Greeley predicted.
The second quarter of 2009 also marked the first time health care surpassed information technology as an investment category, according to Dow Jones, with $2.2 billion invested nationwide in the health-care sector, compared with $1.9 billion in IT.
In New England IT investing continued to fall, dropping from $244.7 million in Q1 to $150.2 million this past quarter. By contrast, health care was the only sector to see an increase, jumping from $317.9 million in Q1 to $370.3 million in Q2.
Maria Cirino, a managing director at .406 Ventures who specializes in IT investing, said venture opportunities in the IT sector aren’t shrinking.
“I think IT will always be at the core of what a lot of companies and organizations need in order to run their businesses — but the universe is changing,” she said. She predicted continued increases in demand for information security, and continued opportunities for growth with new open-source business models.
Meanwhile, fund sizes remain down, as the NVCA highlighted in a separate report earlier this month on venture-capital fundraising. The NVCA reported 25 funds raised $1.7 billion in the second quarter of 2009 — the smallest number of venture funds raising money in a single quarter since Q3 1996.
But Cirino, whose firm is still investing out of the $167 million first fund it closed last year, isn’t holding her breath for a return to the days of bigger funds.
“Will we ever get back there?” she asked. “There’s fat ties and skinny ties, but it’s going to take a long time.”
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