Dow Jones VentureSource: Venture Capital Investment Down 6% From Previous Quarter; IT Outpaces Health Care, But Only Slightly; Investors Favor Later Stage Deals Following an uptick in the second quarter, investments in U.S. venture-backed companies have stalled in the third quarter, putting 2009 on track to be the worst investment year since 2003, according to new data from industry tracker Dow Jones VentureSource. Venture capitalists invested $5.1 billion in 616 deals in the third quarter of 2009, down 6% from the $5.4 billion put into 595 deals during the second quarter of this year. This quarter's total is down 38% from the $8.2 billion invested in 663 deals during the third quarter of 2008. "The slow recovery we've seen for venture capital has faltered," said Jessica Canning, director of global research for Dow Jones VentureSource. "As liquidity and fundraising lag after the economic meltdown in 2008, investors have no choice but to keep a tight rein on investments until the industry is on more solid ground." Scott Austin, editor of Dow Jones VentureWire said: "The current investment pace will likely persist right through 2010, as long as limited partners -- the pension funds, university endowments and other suppliers of capital to venture firms -- continue to scale back their commitment levels to venture funds. With fewer dollars to put to work, venture firms will only invest in the most promising and capital-efficient companies going forward." IT Takes Back Reins From Health Care Information Technology (IT) is back on top after Health Care outpaced the sector for the first time on record in the second quarter of 2009. IT companies raised $1.9 billion in 270 deals during the third quarter of 2009 while Health Care saw $1.7 billion invested in 184 deals. "For the first time, Web 2.0 investments surpassed the software sector," said Ms. Canning. "Although the IT recovery has been sluggish, this quarter's investments in the Web-heavy information services sector are nearly double the investments made in the first quarter of this year." According to VentureSource, the U.S. software sector saw $581 million invested in 106 deals during the third quarter, a 55% decline from the $1.3 billion invested in 143 deals during the same period last year. This is the sector's lowest quarterly investment total since 1996. The information services sector, which includes most of today's Web 2.0 companies, saw investment of $627 million in 86 deals, a 11% increase from the $567 million invested in 74 deals in the third quarter of 2008. Medical Device Investments Nearly Match Biopharmaceuticals While Health Care came in a close second to IT, investment in the industry is down 25% over the same period last year. "Surprisingly, health care investment dropped significantly this quarter," said Ms. Canning. "After several years of growth, 2009 could end with the lowest amount invested in this space since 2000." The number of biopharmaceutical deals rose, but investment dropped 32% from last year. In the third quarter, investment in biopharmaceutical companies totaled $811 million across 83 deals, down from $1.2 billion raised through 73 deals last year. Investments in the medical devices sector were close behind. In the most recent quarter, venture capitalists invested $774 million in 77 deals, down 3% from $796 million raised in 63 deals in the third quarter last year. Energy Investment Plummets From Year Ago, But Up Over 2Q The Energy & Utilities industry raised just $415 million in 23 deals during the third quarter, down 70% from the $1.4 billion invested in 34 deals during the same period last year. Investments in the third quarter were up over the previous quarter which saw $310 million invested in 27 deals in the sector. Investment in the renewable energy sector fell substantially as 14 deals raised $343 million, 73% less than the $1.3 billion invested in 23 deals during the same quarter last year. Elsewhere, the Business and Financial Services industry attracted $560 million in 81 deals, down 32% from the $821 million invested in 91 deals during the third quarter last year. The Consumer Goods industry had a strong quarter with $207 million put into 14 deals, a slight increase from the $202 million invested in 15 deals last year. The Consumer Services industry saw $125 million invested in 20 deals, a 35% drop from the $192 million put into 24 deals last year. The Industrial Goods & Materials industry garnered $169 million in 17 deals, a 27% decrease from the $231 million put to work in 25 deals last year. Corporations Invest Instead of Acquire Corporations may be making fewer acquisitions, but they're stepping up their investing. During the third quarter, venture-backed companies raised 11 corporate rounds garnering $178 million, a 16% increase over the $153 million raised in the same number of rounds last year. This brings the year-to-date total to $650 million, well above the $541 million raised in 2008. VCs Favor Later Stage Deals, Deal Sizes Shrink In the most recent quarter, later stage companies accounted for 40% of deals while first-round deals accounted for 27% of the total deal count. During the same period last year, later stage companies accounted for 33% of deals while first-round deals accounted for 35% of the total deal count. By investment, later stage deals garnered 59% of venture dollars in the third quarter of 2009, up from 52% last year. The proportion of the quarter's investment total going to seed and first rounds was 16%, down from 18% last year. The proportion going to second rounds dropped to 22% from 27%. Recapitalizations accounted for roughly 3% of investments in the third quarter of 2009, on par with last year. The data also shows that median deal size fell to $5 million in the third quarter from the $7 million median seen a year ago. The $5 million median is consistent with the previous two quarters and is the lowest median deal size since 1999. Regional Perspectives As usual, California dominated venture capital activity in the third quarter, representing 41% of the nation's deal flow and 54% of the capital invested. By major region, the VentureSource data showed that: -- Investment in the San Francisco Bay Area fell 33% compared to the third quarter of 2008 with $2.2 billion with 183 deals completed. -- Texas garnered $192 million in venture capital with 29 deals done, up 44% from a year ago. -- New England garnered $526 million in 76 deals, a 37% decline from investment in the region during the third quarter of 2008. -- Venture capitalists invested 48% less capital in Southern California during the third quarter with $458 million put into 66 deals. -- The New York Metro region attracted $268 million in 56 deals, down 51% from a year ago. -- Investors put just $100 million into 16 deals in Colorado during the third quarter, after investing a record $300 million in the previous quarter. -- Investment in Washington dropped 47% from one year ago to $148 million with 18 deals completed. -- With seven venture deals, North Carolina's Research Triangle received $56 million in venture financing in the third quarter, 35% less than during the same period last year. -- The Potomac region attracted 39% less capital in the third quarter with $175 million going into 27 deals. About Dow Jones VentureSource's Research Methodology The investment figures included in this release were collected by surveying professional venture capital firms, through in-depth interviews with portfolio company CEOs and CFOs, and from a number of secondary sources. These statistics represent equity investments into early-stage, innovative companies only and do not include companies receiving funding solely from corporate, individual, and/or government investors, or from buyout or other non-VC investment firms. For deeper analysis, download the complete report from Dow Jones VentureSource at http://fis.dowjones.com/VS/3QUSFinancing.html. You can also follow the story at http://www.twitter.com/djventurewire. For general information about VentureSource, visit http://venturecapital.dowjones.com/. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice. Copyright © 2009, Dow Jones VentureSource About Dow Jones Dow Jones & Company (http://www.dowjones.com/) is a subsidiary of News Corporation (Nasdaq: NWS, NWS.A; ASX: NWS, NWSLV; http://www.newscorp.com/). Dow Jones is a leading provider of global business news and information services. Its Consumer Media Group publishes The Wall Street Journal, Barron's, MarketWatch and the Far Eastern Economic Review. Its Enterprise Media Group includes Dow Jones Newswires, Factiva, Dow Jones Client Solutions, Dow Jones Indexes and Dow Jones Financial Information Services. Its Local Media Group operates community-based information franchises. Dow Jones owns 50% of SmartMoney and 33% of Stoxx Ltd. and provides news content radio stations in the U.S. DATASOURCE: Dow Jones & Company CONTACT: Kim Gagliardi, Dow Jones & Company, +1-603-864-8873, Web Site: http://www.venturecapital.dowjones.com/

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