Venture capitalists reawaken

Fourth quarter saw a surge in new deals

By D.C. Denison
Globe Staff / January 22, 2010

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Venture capitalists dramatically cut the funding they provide to start-up and growth companies in 2009, as total investments plunged to their lowest level since 1997. But in a sign that the worst could be over, the end of the year saw an uptick in both dollars and number of deals.

Those trends played out the same way in New England and across the country, according to the MoneyTree Report, which is scheduled to be released today. The report is authored by accounting firm PricewaterhouseCoopers and trade group the National Venture Capital Association, and is based on data from research firm Thomson Reuters.

In return for a share of the business, venture capitalists provide the funds companies need to start operations or grow. Venture investments in 2009 totaled $17.7 billion, a 37 percent decrease in dollars and a 30 percent de crease in deal volume from 2008. It was the second consecutive year of deal and dollar declines.

Mark Heesen, president of the National Venture Capital Association, attributed the decline to the economic crisis of 2008, which peaked in the fall of that year and cast a pall over the venture community that lasted well into 2009.

“The venture capital industry had no choice but to slow the investment pace in 2009,’’ Heesen said.

But an increase in deals during the fourth quarter of 2009 caused some analysts to predict that the venture community was bouncing back from its recession doldrums.

Venture capitalists “placed more bets in the fourth quarter of 2009 than we’ve seen all year,’’ noted Tracy T. Lefteroff, global managing partner at PricewaterhouseCoopers LLP.

Although US biotechnology investing declined 19 percent in 2009 - in both dollars and deals - it was the sector that received the most funding, with $3.5 billion going into 406 deals. Biotech investment dollars rose 10 percent from the third quarter to the fourth quarter, with $1 billion going into 108 deals. Biotech was also the number one sector for dollars invested in the fourth quarter and the only industry sector receiving more than $1 billion in the fourth quarter.

New England moved in tandem with the national trends. Total 2009 venture investments in the region added up to $2.1 billion, a significant decrease from the previous year’s total of $3.3 billion. Yet there was also a jump in the fourth quarter in New England, to $634.8 million from $551.6 in the previous quarter.

“In 2009 venture capitalists were conservative, cautious; but that was prudent given the conditions they were dealing with,’’ said Kevin Shaw, head of PricewaterhouseCoopers’ emerging company services practice in Boston.

Nationally, first-time financings in 2009 for start-up companies reached its lowest annual dollar and deal level since the MoneyTree Report was launched in 1995.

Jeff Fagnan, a partner with Atlas Venture in Waltham, was not surprised by the small number of companies getting venture funding for the first time.

“It was a year in which venture capitalists focused on their portfolios at the expense of new companies,’’ he said. “ ‘Triage’ was the most overused word in 2009.’’

In New England, biotechnology attracted $219 million in venture capital investment in the last quarter, the most of any sector. Software was second at $118 million.

The largest single venture capital deal in New England during the last three months of 2009 was also in the biotechnology area: Virdante Pharmaceuticals, Inc., of Cambridge, raised $43.8 million. Virdante develops drug technologies for autoimmune and inflammatory diseases.

Although New England’s yearly numbers were down, PricewaterhouseCoopers’ Shaw was encouraged by the steady rise during the year. The total number of investments in New England, for example, was 74 in the first quarter; by the fourth quarter, it had risen to 101.

“The upward trend is a positive sign for 2010,’’ Shaw said.

D.C. Denison can be reached at