What the Venture Capital Funding Data Means

VCs are getting a little cautious–and that’s OK.

In the U.S., venture capital outlays dropped 8.5 percent to $7.1 billion in the three months ending March 31 from the $7.8 billion invested in the previous quarter. First-quarter US investment totals were the smallest since the fourth quarter of 2006, according to the report prepared by the Thomson Reuters research house and the PricewaterhouseCoopers accounting firm for the National Venture Capital Association.

While an 8% drop in the revenue of publicly traded company would prompt a whupping, these numbers aren’t as negative as they seem. Here’s why:

1. There is no capital crunch. VC funding is still at a historically high rate. VC investments levels hit a six-year high in 2007. And $7.1 billion is a lot of money. The outlays, while lower, remained in line with the $7 billion-plus level seen in each of the past five quarters. Wht does this mean? Good and/or promising companies can still raise money.

2. Parts of the VC market are humming. Web 2.0 is hot, while health care may be cooling, according to data from VentureSource. All this is a reminder that the VC market is not homogenous. Venture capital firms invested $1.74 billion in 142 health care companies, a drop of 43% and 19%, respectively, from the year-ago quarter. Since several health care firms have recently raised large funds, the drop-off may be temporary.

On the other hand, companies VentureSource classifies as information services, which includes many companies dealing on the Internet–continued to draw capital. Investment funding jumped to $1.59 billion in the first quarter of 2008, more than doubling the $776 million reported in the year-ago quarter. And the number of deals here rose 38% to 170 from 105 a year earlier.

3. India surpassed China as a VC destination. One interesting nugget in the Moneytree survey was that in the quarter U.S. venture capitalists invested $350 million in 38 deals in India, a 42 percent increase in dollars from the fourth quarter when $246 million went into 33 companies. That compares to $250 million invested in 32 deals in China, representing a 24 percent decline in dollar volume from the fourth quarter when $331 million was invested in 39 deals. Until now, China’s entrepreneurial economy was more advanced than India’s. This quarter could mark an inflection point in the race to become the next Silicon Valley.


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