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N.E. slips to 3d place in venture investing

Decline spurs worries over region's economy

Venture-capital investing in New England slowed in the second quarter, as the region slipped from its traditional spot as the number two market for start-up companies in the technology and life sciences fields, according to the MoneyTree survey released yesterday.

New England start-ups raised $621.9 million in April, May, and June, a 34.8 percent drop from the $953.2 million raised in the corresponding period a year earlier, the survey showed.

Analysts expressed worry yesterday that one of the state's traditional strengths was showing signs of weakness.

''Any measurable decline in VC investing in New England would significantly undermine its most important comparative economic advantage, namely businesses that develop and commercialize leading-edge technologies," Mark Zandi, chief economist of Economy.com, a Pennsylvania forecasting firm, wrote in an e-mail. ''New England's economic wealth is intimately tied to the success of its technology industries, which in turn depend on VC financing to thrive."

Second-quarter investments in the region were 1 percent lower than the $628.4 million invested in the first quarter of this year, according to MoneyTree.

The venture-capital survey, which gauges the financial fuel of the innovation economy, was sponsored by the PricewaterhouseCoopers accounting firm, the research firm Thomson Venture Economics, and the National Venture Capital Association.

For years, New England start-ups have attracted more venture capital than start-ups in any other region except Silicon Valley, the nation's high-tech capital. But in the second quarter, funding totals for both Silicon Valley and the New York metropolitan region outpaced New England's. Silicon Valley companies drew $1.9 billion in venture financing, while those in the New York region took in $758.7 million.

Economists cautioned against attaching too much weight to one quarter's results, but if those numbers presage a trend, it could mean New England's major competitive advantage is at risk.

John Bitner, chief economist at Eastern Investment Advisors, a unit of Eastern Bank in Boston, said the presence of world-class universities and big healthcare institutions make it likely that New England will continue to be a hub of innovation, but he noted that companies tend to stay in the regions where they started up.

''If it's a trend," Bitner said of the results in the venture-capital survey, ''it's certainly a negative for the New England economy. We have a long history of spawning innovation. That's our strength, our future."

According to the survey, New York catapulted over New England mostly because the quarter's two largest venture deals involved companies in the New York region. Integro Ltd., a financial services start-up in New York, raised $311.7 million in a seed, or early-stage, round. And the telecommunications company Vonage Holdings Corp., of Edison, N.J., raised $199.9 million in a later-stage round.

Among the top 10 recipients of venture capital in the second quarter, six were in California; none were in New England.

''Investments in New England have been overshadowed by very large investments in other regions," said Matthew Littlewood, a partner in the Boston office of PricewaterhouseCoopers, who noted that Boston-area venture firms were active in funding start-ups elsewhere in the country. ''We're not seeing the larger investments being made here, but it's really too early to tell if this portends a trend for the region."

While the second-quarter numbers may have been skewed by the big New York deals, and New England may regain its edge over New York in the third quarter, a longer-term competitive threat may be the emergence of Southern California, strong in biotechnology, defense, and entertainment, as one of the top magnets for venture capital.

MoneyTree currently divides Southern California into two contiguous regions: Los Angeles/Orange County and San Diego. Each by itself still attracts fewer venture dollars than New England: LA/Orange County drew $494 million, and San Diego drew $394.7 million in the second quarter. But taken together, they now surpass New England.

''Southern California is starting to nip at the heels of New England as the second-strongest area for venture investing," said Mark G. Heesen, president of the National Venture Capital Association, a trade group in Arlington, Va. ''I think, long term, that's something New England should be aware of. If you're a New England economic development coordinator, you should be looking at that."

Nationally, venture capital firms invested a total of $5.8 billion in the second quarter. That was down 4.8 percent from the $6.1 billion invested in the second quarter of 2004, but up 18.6 percent from the $4.9 billion invested in the first quarter of this year. A total of 750 companies were funded in the three months ended June 30, compared to 805 in the year-ago quarter and 703 in the previous quarter.

The funding of life sciences companies, which declined to $1 billion in the first quarter, amid concerns about increased regulatory scrutiny by the Food and Drug Administration, rebounded to $1.5 billion in the second quarter. Life sciences accounted for 25 percent of venture investment in the period, while software accounted for 23 percent.

Robert Weisman can be reached at weisman@globe.com. Chris Reidy of the Globe staff contributed to this report.

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